ECONOMY-WIDE EFFECTS OF MONETARY POLICY SHOCKS: EVIDENCE FROM PAKISTAN

Abstract

Monetary policy plays an effective role in affecting output, employment, prices, interest rate and exchange rate. The goal of a sustainable economic growth and employment is attainable only if the prices in an economy are stable because stable prices lead to an efficient allocation of resources and also encourage households to save more and investors to invest more, thus contributes in capital formation by minimizing the risk of erosion of assets value.There isa wide range of transmission channels through whichmonetary policy affects the macroeconomic indicators. Keeping in view the financial crisis of 2008 and considering the exchange rate channel, this paper is an attempt to assessthe effects of monetary policy shocks on major macroeconomic variables.Vector Autoregressive model is used in this study to trace out the effects of monetary policy shocks on output, prices and exchange rate. Our findings show that monetary policy shockstransmit into inflation and exchange rate thus affects output in the long run.