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Empirical Economics

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01-05-2014

Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach

Authors: Kashif Munir, Abdul Qayyum

Published in: Empirical Economics | Issue 3/2014

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Abstract

This paper examines the effects of monetary policy on macroeconomic variables in Pakistan’s economy using a data-rich environment. We used the factor-augmented vector autoregressive (FAVAR) methodology, which contains 115 monthly variables for the period 1992:01 to 2010:12. We compared the results of VAR and FAVAR model and the results showed that FAVAR model explains the effects of monetary policy which are consistent with the theory and better than the VAR model. VAR model shows the existence of price puzzle and liquidity puzzle in Pakistan while FAVAR model did not provide any evidence of puzzles. Interest rate negatively influences prices, hence interest rate is a good instrument for controlling inflation in Pakistan but it takes a lag of 5 months. The transmission of monetary policy shock is faster in case of prices as compared to output in Pakistan. FAVAR model supports the effectiveness of interest rate channel in Pakistan.

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Title: Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach
Authors: Kashif Munir
Abdul Qayyum
Publication date: 01-05-2014
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 3/2014
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-013-0702-9

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