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External Monetary Constraints Imposed by Developed Economies on Developing Economies: Empirical Evidence from Pakistan

Muhammad Ali Rizwan, Muhammad Zeeshan Younas (), Hafiza Sadaf Zahra and Zartaj Jamil
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Muhammad Ali Rizwan: M.Phil Graduate, Quaid-I-Azam University, Islamabad Pakistan.
Hafiza Sadaf Zahra: M.Phil. Graduate, Pakistan Institute of Development Economics (PIDE), Islamabad Pakistan.
Zartaj Jamil: M.Phil. Graduate from National University of Science and Technology (NUST), Islamabad Pakistan.

Asian Development Policy Review, 2020, vol. 8, issue 1, 7-29

Abstract: The problem with the most of the developing economies is that their monetary policy is constrained by external shocks and developed economies central banks especially FED and ECB. In this research, we examine the effects of major external shocks like global oil price shocks, foreign interest rate shocks and global food price shocks on the major macro variables of Pakistan which creating hurdles for the SBP to achieve its monetary policy objectives independently. The results stating that the global oil price and global food price shocks have direct impacts on the major macro variables of Pakistan and put inflationary pressure on the Pakistan economy which making difficult for the central bank to achieve its predetermined dual objective of monetary policy i.e. full employment and stable inflation. Additionally, we examine how the changes in US monetary policy effects Pakistan economy and find that positive foreign interest rate shock has minor impacts on the major macro variables of Pakistan except for the exchange rate and domestic inflation rates which is also imposing an external constraint on the monetary policymaking process of Pakistan central bank. In a nutshell, all these external shocks are creating hurdles and imposing monetary constraints on the Pakistan which making difficulties for Pakistani central bank to achieve its monetary policy objectives.

Keywords: External shocks; External monetary constraints; Monetary policy; Oil price shocks; Food price shocks; SVAR; IRFs; GFEVDs. (search for similar items in EconPapers)
JEL-codes: B23 E44 E52 E5 F02 (search for similar items in EconPapers)
Date: 2020
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