Short-Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan

No 22, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: The study provides an empirical update on the impact of an unanticipated change in monetary policy on key macroeconomic variables (output growth and inflation) in Pakistan. We use monthly data and multivariate structural vector auto-regression (SVAR) technique using long-run restrictions based on standard aggregate demand and supply model of the economy. The results indicate that an unanticipated positive shock in monetary policy leads to: (1) an increase in industrial output, which reverts to its original level over 23 to 32 month horizon; (2) an increase in inflation; and (3) nominal (monetary) shocks remain the dominant factor in explaining variation in inflation as compared to supply side disturbances. Transmission mechanism is much faster in case of prices compared to output, as over 75 percent change in CPI is realized during 12 months after the shock and this impact reaches the level of over 90 percent during 18 months. Sensitivity of these results to another specification indicates that response patterns of both industrial production index and CPI remain unchanged. Length: 28 pages

Keywords: Monetary policy; central bank; SVAR; long-run restrictions (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Date: 2008-03
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Citations: View citations in EconPapers (13)

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Journal Article: Short Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan (2008)
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