Identification of Monetary Policy Shocks

This book states identification conditions to reveal the dynamic effects of monetary policy shocks on the non-policy variables for Pakistan. It finds that increase in money has generated unusual inflationary episodes. The results confirm remarkable differences in the monetary policy transmission mechanism. The Central Bank can exercise an effective control on inflation by adjusting output growth forecasts in the middle of the three threshold periods identified in this study. The monetary authority mainly relies on encouraging demand and supply shocks to restore inflation to its desired long-run level. This analysis implies that only a small proportion of the observed repetitive variation is attributable to random variation in policy and the real policy effect is smaller than usual belief. Pakistan s experience with monetary policy supports the existence of the so-called Price Puzzle. This analysis also shows that interest rate based policy has been much more sensitive to exogenous shocks; responding not only to current or lagged inflation but also to expected inflation and output stability.