Assessing the Role of Money versus Interest Rate in Pakistan

Zafar Hayat, Muhammad Nadim Hanif


We have empirically examined the role of monetary aggregate(s)
vis-à-vis short-term interest rate as monetary policy instruments, and
the impact of State Bank of Pakistan’s transformation into the latter on
their relative effectiveness in terms of inflation in Pakistan. Using
indicators of ‘persistent changes’ in the underlying behaviours of
variables of interest, we found that broad money consistently explains
inflation in (i) monetary (ii) transitory and (iii) interest rate
regimes. Though its role has receded while moving from the transition to
the interest rate regime, the interest rate instrument seems to be
positively related to inflation, a phenomenon commonly known as price
puzzle. In light of these findings, we recommend that the role of money
should not be completely de-emphasised. JEL Classification: E31, E52.
Keywords: Monetary Policy Instruments, Price Puzzle, ARDL, Pakistan

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