The effectiveness of monetary policy in small Open-Economy: An SVAR study for Pakistan

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Abstract

This paper examines the effectiveness of monetary policy and its transmission channels in Pakistan. Unlike previous studies, this paper considers external variables, including world commodity prices and tradeweighted variables of output and interest rate. This study has employed the structural vector autoregressive (SVAR) model with block-exogeneity and non-recursive identification scheme in modeling monetary policy shocks in Pakistan. The results have revealed that the effectiveness of monetary policy in Pakistan is limited in stabilizing key domestic variables. The shutdown methodology in SVAR has been used to examine the strength of monetary policy transmission channels i.e. interest rate, credit, exchange rate and asset price channels. The interest rate channel of monetary policy is only effective in the short run while credit channel in both short run and long run. This finding assures the State Bank of Pakistan (SBP) to rely on interest rate channel to control inflation and utilize the credit channel to enhance the output in the long run.

Original languageEnglish
Pages (from-to)279-296
Number of pages18
JournalInternational Journal of Economics and Management
Volume10
Issue number2
Publication statusPublished - 2016

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Pakistan
Interest rates
Vector autoregressive
Monetary policy
Small open economy
Short-run
Credit channel
Transmission channel
Exogeneity
Commodity prices
Monetary policy transmission
Modeling
Methodology
Inflation
Monetary policy shocks
Credit
Vector autoregressive model
Exchange rates
Asset prices

Keywords

  • Monetary policy effectiveness
  • Small open economy
  • SVAR
  • Transmission channels

ASJC Scopus subject areas

  • Business and International Management
  • Economics, Econometrics and Finance(all)
  • Strategy and Management

Cite this

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title = "The effectiveness of monetary policy in small Open-Economy: An SVAR study for Pakistan",
abstract = "This paper examines the effectiveness of monetary policy and its transmission channels in Pakistan. Unlike previous studies, this paper considers external variables, including world commodity prices and tradeweighted variables of output and interest rate. This study has employed the structural vector autoregressive (SVAR) model with block-exogeneity and non-recursive identification scheme in modeling monetary policy shocks in Pakistan. The results have revealed that the effectiveness of monetary policy in Pakistan is limited in stabilizing key domestic variables. The shutdown methodology in SVAR has been used to examine the strength of monetary policy transmission channels i.e. interest rate, credit, exchange rate and asset price channels. The interest rate channel of monetary policy is only effective in the short run while credit channel in both short run and long run. This finding assures the State Bank of Pakistan (SBP) to rely on interest rate channel to control inflation and utilize the credit channel to enhance the output in the long run.",
keywords = "Monetary policy effectiveness, Small open economy, SVAR, Transmission channels",
author = "Nizamani, {Abdul Rahman} and {Abdul Karim}, Zulkefly and Zaidi, {Mohd Azlan Shah} and Norlin Khalid",
year = "2016",
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journal = "International Journal of Economics and Management",
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publisher = "Universiti Putra Malaysia",
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T1 - The effectiveness of monetary policy in small Open-Economy

T2 - An SVAR study for Pakistan

AU - Nizamani, Abdul Rahman

AU - Abdul Karim, Zulkefly

AU - Zaidi, Mohd Azlan Shah

AU - Khalid, Norlin

PY - 2016

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N2 - This paper examines the effectiveness of monetary policy and its transmission channels in Pakistan. Unlike previous studies, this paper considers external variables, including world commodity prices and tradeweighted variables of output and interest rate. This study has employed the structural vector autoregressive (SVAR) model with block-exogeneity and non-recursive identification scheme in modeling monetary policy shocks in Pakistan. The results have revealed that the effectiveness of monetary policy in Pakistan is limited in stabilizing key domestic variables. The shutdown methodology in SVAR has been used to examine the strength of monetary policy transmission channels i.e. interest rate, credit, exchange rate and asset price channels. The interest rate channel of monetary policy is only effective in the short run while credit channel in both short run and long run. This finding assures the State Bank of Pakistan (SBP) to rely on interest rate channel to control inflation and utilize the credit channel to enhance the output in the long run.

AB - This paper examines the effectiveness of monetary policy and its transmission channels in Pakistan. Unlike previous studies, this paper considers external variables, including world commodity prices and tradeweighted variables of output and interest rate. This study has employed the structural vector autoregressive (SVAR) model with block-exogeneity and non-recursive identification scheme in modeling monetary policy shocks in Pakistan. The results have revealed that the effectiveness of monetary policy in Pakistan is limited in stabilizing key domestic variables. The shutdown methodology in SVAR has been used to examine the strength of monetary policy transmission channels i.e. interest rate, credit, exchange rate and asset price channels. The interest rate channel of monetary policy is only effective in the short run while credit channel in both short run and long run. This finding assures the State Bank of Pakistan (SBP) to rely on interest rate channel to control inflation and utilize the credit channel to enhance the output in the long run.

KW - Monetary policy effectiveness

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KW - Transmission channels

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