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Short-Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan

Listed author(s):
  • Mahmood ul Hasan Khan

    ()

    (State Bank of Pakistan)

The study provides an empirical update on the impact of an unanticipated change in monetary policy on key macroeconomic variables (output growth and inflation) in Pakistan. We use monthly data and multivariate structural vector auto-regression (SVAR) technique using long-run restrictions based on standard aggregate demand and supply model of the economy. The results indicate that an unanticipated positive shock in monetary policy leads to: (1) an increase in industrial output, which reverts to its original level over 23 to 32 month horizon; (2) an increase in inflation; and (3) nominal (monetary) shocks remain the dominant factor in explaining variation in inflation as compared to supply side disturbances. Transmission mechanism is much faster in case of prices compared to output, as over 75 percent change in CPI is realized during 12 months after the shock and this impact reaches the level of over 90 percent during 18 months. Sensitivity of these results to another specification indicates that response patterns of both industrial production index and CPI remain unchanged. Length: 28 pages

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File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp22.pdf
File Function: First version, 2008
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Paper provided by State Bank of Pakistan, Research Department in its series SBP Working Paper Series with number 22.

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Date of creation: Mar 2008
Handle: RePEc:sbp:wpaper:22
Contact details of provider: Postal:
CENTRAL DIRECTORATE, I.I. CHUNDRIGAR ROAD, KARACHI-74000

Web page: http://www.sbp.org.pk/repec/sbp/index.html
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