Assessing the Role of Money versus Interest Rate in Pakistan

Zafar Hayat () and Muhammad Hanif
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Zafar Hayat: State Bank of Pakistan

No 79, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: 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.

Keywords: Monetary policy instruments; price puzzle; ARDL; Pakistan (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2016-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Journal Article: Assessing the Role of Money versus Interest Rate in Pakistan (2020)
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