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A structural VAR (SVAR) approach to cost channel of monetary policy

  • Faiz ur, rehman
  • Wasim, shahid malik

The study aims at investigating, whether or not the cost channel of monetary policy is effective in Pakistan. The cost channel is one of the theoretical justifications of Price Puzzle, a phenomenon that has been observed in a number of empirical studies. Using Structural Vector Autoregression (SVAR) and data from different industries of manufacturing sector of Pakistan over the period 2001:M07-2008:M04, we find strong evidence in favor of Price Puzzle in major industries. In industries like textile, food and beverages, pharmaceuticals, automobiles, and fertilizers, cost channel dominates the traditional demand channel. Same behavior is observed for aggregate price level in the overall manufacturing sector. The main reason for the result is the dependency of the above mentioned industries on short-term borrowing to finance their operational liquidity.

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File URL: http://mpra.ub.uni-muenchen.de/32349/1/MPRA_paper_32349.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32349.

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Date of creation: 31 Dec 2010
Date of revision: 09 Feb 2011
Handle: RePEc:pra:mprapa:32349
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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Working Paper Series, Macroeconomic Issues WP-96-28, Federal Reserve Bank of Chicago.
  3. Bils, Mark & Chang, Yongsung, 2000. "Understanding how price responds to costs and production," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 33-77, June.
  4. Chowdhury, Ibrahim & Hoffmann, Mathias & Schabert, Andreas, 2004. "Inflation dynamics and the cost channel of monetary transmission," CFR Working Papers 04-01, University of Cologne, Centre for Financial Research (CFR).
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  7. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
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  12. Alam, Tasneem & Waheed, Muhammad, 2006. "The monetary transmission mechanism in Pakistan: a sectoral analysis," MPRA Paper 2719, University Library of Munich, Germany, revised 13 Apr 2007.
  13. Eugenio Gaiotti & Alessandro Secchi, 2004. "Is there a cost channel of monetary policy transmission? An investigation into the pricing behavior of 2,000 firms," Macroeconomics 0412010, EconWPA.
  14. Farmer, Roger E A, 1984. "A New Theory of Aggregate Supply," American Economic Review, American Economic Association, vol. 74(5), pages 920-30, December.
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  16. Olivier J. Blanchard & Mark W. Watson, 1987. "Are Business Cycles All Alike?," NBER Working Papers 1392, National Bureau of Economic Research, Inc.
  17. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238.
  18. Mohsin S. Khan & Axel Schimmelpfennig, 2006. "Inflation in Pakistan: Money or Wheat?," IMF Working Papers 06/60, International Monetary Fund.
  19. Basu, Susanto, 2000. "Understanding how price responds to costs and production: A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 52(1), pages 79-85, June.
  20. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
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