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The Role of Money in Explaining Business Cycles for a Developing Economy: The Case of Pakistan

Author

Listed:
  • Shahzad Ahmad

    (State Bank of Pakistan)

  • Farooq Pasha

    (State Bank of Pakistan)

  • Muhammad Rehman

    (State Bank of Pakistan)

Abstract

This paper theoretically evaluates the role of money and monetary policy in propagating business cycle fluctuations of Pakistan’s economy. We introduce the role of money via money in utility (MIU) and cash in advance constraint (CIA) in simple closed economy DSGE models and analyze monetary policy through a money growth rule as well as Taylor type interest rate rule. We establish the theoretical and empirical linkages between nominal and real variables of Pakistan’s economy for post financial liberalization era. We find that the cash base economy models under money growth rule matches the data relatively better compared to cashless economy with Taylor rule.

Suggested Citation

  • Shahzad Ahmad & Farooq Pasha & Muhammad Rehman, 2016. "The Role of Money in Explaining Business Cycles for a Developing Economy: The Case of Pakistan," SBP Working Paper Series 74, State Bank of Pakistan, Research Department.
  • Handle: RePEc:sbp:wpaper:74
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    References listed on IDEAS

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    Cited by:

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    4. Zafar Hayat & Muhammad Nadim Hanif, 2020. "Assessing the Role of Money versus Interest Rate in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 101-114.

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    More about this item

    Keywords

    General Equilibrium Models; Modeling and Simulations; Monetary Policy;
    All these keywords.

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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