Dynamic effects of monetary policy on output and prices in Pakistan: a disaggregate analysis

Kashif Munir

Journal of the Asia Pacific Economy, 2018, vol. 23, issue 1, 99-118

Abstract: This paper examines the effects of monetary policy on output and prices in Pakistan at disaggregate level using a data rich environment. Factor Augmented Vector Autoregressive (FAVAR) methodology has been used, which contains 115 monthly macroeconomic variables for the period January 1992 to December 2010. An unanticipated increase in discount rate reduces output at aggregate level, i.e. industrial production index (IPI); however, individual commodities do not show the same behavior. The result reveals that monetary policy has heterogeneous effect on production and has real effects in the short run and it can help in increasing growth if used effectively. A tight monetary policy leads towards decline in consumer price index (CPI) and wholesale price index (WPI) at aggregate level. However, there is strong heterogeneity among prices in Pakistan following a shock in monetary policy flowing from change in discount rate. Some of the prices show flexibility, while others show a sluggish behavior. A shock in monetary policy transmits to wholesale prices earlier than to consumer prices. The main policy implications are that monetary policy has real effects in the short run and interest rate negatively influences prices with heterogeneous effects.

Date: 2018
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DOI: 10.1080/13547860.2017.1354517

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