Effectiveness of Monetary Policy in Controlling Inflation in Pakistan in the Presence of Positive and Negative Oil Price Changes
https://doi.org/10.35536/lje.2024.v29.i2.a2
Keywords:
Monetary policy, effectiveness, PakistanAbstract
This study evaluates the effectiveness of monetary policy in controlling inflation in Pakistan. Using quarterly data from 1980 to 2022, the study finds that the policy rate is either an ineffective or counterproductive instrument, while the monetary base serves as an effective tool for controlling inflation. Significant evidence is found against the view that monetary policy is ineffective in controlling inflation in the presence of inflationary cost-push shocks. The study also finds that the effectiveness of monetary policy is asymmetric in combating inflation during inflationary and anti-inflationary oil price shocks. Despite these observations, the study recommends a cautious approach based on additional research involving diverse tools and experimentation with a gradual mixing of instruments.
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