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Assessing the Role of Money versus Interest Rate in Pakistan


  • Zafar Hayat

    (State Bank of Pakistan)

  • Muhammad Nadim Hanif

    (State Bank of Pakistan)


We empirically examine the role of monetary aggregate(s) vis-à-vis short term interest rate as monetary policy instruments, and the impact of State Bank of Pakistan’s transformation towards the latter on their relative effectiveness in terms of inflation in Pakistan. Using indicators of ‘persistent changes’ in the underlying behaviors of variables of interest, we found that broad money consistently explains inflation in (i) monetary, (ii) transitory and (iii) interest rate regimes. Though its role has receded whilst moving from the transition to the interest rate regime, the interest rate instrument seems to be positively related to inflation, a phenomenon commonly known as price puzzle. There is need to explore it further. In light of these findings, we recommend that the role of money should not be completely de-emphasized while moving towards flexible inflation targeting regime as planned.

Suggested Citation

  • Zafar Hayat & Muhammad Nadim Hanif, 2016. "Assessing the Role of Money versus Interest Rate in Pakistan," SBP Working Paper Series 79, State Bank of Pakistan, Research Department.
  • Handle: RePEc:sbp:wpaper:79

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    Cited by:

    1. Hayat, Zafar & Balli, Faruk & Rehman, Muhammad, 2017. "The relevance and relative robustness of sources of inflation bias in Pakistan," Economic Modelling, Elsevier, vol. 63(C), pages 283-303.

    More about this item


    Monetary policy instruments; price puzzle; ARDL; Pakistan;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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