Muni , Kashi
A icle
E ec i eness o mone a y policy on money and c edi in
Pakis an
Con empo a y Economics
P o ided in Coope a ion wi h:
VIZJA Uni e si y, Wa saw
Sugges ed Ci a ion: Muni , Kashi (2020) : E ec i eness o mone a y policy on money and c edi in
Pakis an, Con empo a y Economics, ISSN 2300-8814, Uni e si y o Economics and Human Sciences
in Wa saw, Wa saw, Vol. 14, Iss. 2, pp. 162-181,
h ps://doi.o g/10.5709/ce.1897-9254.338
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/297522
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This pape analyzes he e ec i eness o mone a y policy on money and c edi in Pakis an by using
he da a ich en i onmen . FAVAR model is used which consis s o 115 mac oeconomic a iable o
he pe iod 1992:01 o 2010:12. Resul s depic ha a e a posi i e shock in in e es a e (discoun
a e), M0 and M1 do no show any signi ican esponse, while M2 shows an ins an aneous decline
and shows e i al a e 34 mon hs. C edi o public sec o en e p ises and c edi o p i a e sec o
bo h decline a e a posi i e shock in mone a y policy bu c edi o p i a e sec o declines mo e
han c edi o public sec o en e p ises and M2. An inc ease in in e es a e discou ages p i a e sec-
o which leads o slowdown in he economic ac i i ies and c ea es p essu e on p ices o inc ease.
In Pakis an, he ad e se ic im o mone a y policy is c edi o p i a e sec o , he e o e policy should
be ailo ed o conside he demands o c edi by p i a e sec o . The policies should be made which
p o ide he c edi o p i a e sec o a a subsidized a e and he en i onmen o in es men should
be p omo ed by he au ho i ies in he coun y.
1. In oduc ion 1. In oduc ion
P ima y goals o mone a y policy in Pakis an a e eco-
nomic g ow h, con olling in la ion, p omo ing p i-
a e in es men , keeping inancial ma ke s s able, and
building o eign exchange ese es. Howe e , money
and c edi a e he li eblood o an economy, specially
he de eloping economies. A ise in in e es a e in-
c eases he cos o holding money and c edi , and de-
mand o money and c edi declines in he economy
and educes he economic ac i i ies. In case o Paki-
s an, discoun a e (in e es a e) is he di ec ins u-
men o mone a y policy, while M2 is he a ge ed
a iable. GDP g ow h a e shows pe sis en decline in
he p e ious decade (2000 o 2010) in Pakis an, while
in la ion was in wo digi s. Kamin e al. (1998) a gued
ha inancial ma ke s especially in eme ging and un-
de de eloped economies a e so poo ly de eloped ha
he quan i y o c edi and i s p ice becomes an impo -
an ins umen o mone a y policy. The c edi chan-
nel is an enhancemen mechanism encompassing a se
o ac o s ampli ying and ansmi ing he in e es a e
e ec , i is no an independen channel (Be nanke &
Ge le , 1995).
C edi o p i a e sec o is he engine o g ow h in
de eloping coun ies bu wi h he igh ening o mon-
e a y policy, he c edi o p i a e sec o squeezes. S a e
Bank o Pakis an (SBP) has o con ol he double digi
in la ion a he cos o c edi o p i a e sec o which
E ec i eness o Mone a y Policy on Money
and C edi in Pakis an
ABSTRACT
C32, E52
KEY WORDS:
JEL Classi ica ion:
Mone a y Policy, Money, C edi , VAR, FAVAR.
Uni e si y o Cen al Punjab, Pakis an
Co espondence conce ning his a icle should be add essed
o: Kashi Muni , Uni e si y o Cen al Punjab, Pakis an. E-
mail: kashi muni [email p o ec ed]
Kashi Muni
P ima y submission: 22.02.2018 | Final accep ance: 03.07.2019
163 Kashi Muni
10.5709/ce.1897-9254.338DOI: CONTEMPORARY ECONOMICS
Vol. 14 Issue 2 162-1812020
has pushed he economy in o s ag la ion in he las
decade (Amjad e al., 2011). Endogenous changes
in he ex e nal inance p emium lead o inc ease he
di ec impac o mone a y policy on in e es a e.
Mishkin (1995) a gued ha size o ex e nal inance
p emium e lec s impe ec ions in he inancial ma -
ke s and a ec ed by he agency p oblems. Be nanke
and Ge le (1995) a gued ha he e a e wo possible
channels h ough which a cen al bank can in luence
he ex e nal inance p emium in he c edi ma ke i.e.
bank lending channel, and balance shee channel.
Acco ding o Agha e al. (2005), bank lending is
he mos impo an channel o ansmission in Paki-
s an. Mo eo e , Alam and Waheed (2006) ound ha
mone a y policy has eal e ec s on he economy in
he sho un. Ahmad and Qayyum (2008) a gued
ha in es men unc ion indica es ha inc ease in
go e nmen cu en spending and in e es a e dis-
cou ages p i a e in es men and simila ly mac oeco-
nomic ins abili y and unce ain y a ec he p i a e
in es men nega i ely. C edi channel is an impo an
channel o mone a y ansmission mechanism in
Pakis an.
To achie e he goals o mone a y policy, a ho -
ough unde s anding o he mone a y ansmission
mechanism is essen ial. The objec i e o his s udy is
o explo e he impac o mone a y policy on money
and c edi in Pakis an in a da a ich en i onmen .
Money includes all ypes o money used in Pakis an
i.e. M0: Rese e Money, M1: Na ow Money, and M2:
B oad Money, while c edi includes c edi o public
sec o en e p ises and c edi o p i a e sec o o ully
unde s and he ansmission mechanism o mon-
e a y policy on money and c edi in Pakis an. The
main con ibu ion o his s udy is ha i measu es he
e ec i eness o mone a y policy on money and c edi
in a da a ich en i onmen , while his ype o exe cise
has no been unde aken so a o Pakis an.
Res o he pape is o ganized in he ollowing
ways. Sec ion 2 desc ibed he p e ious li e a u e.
Desc ip i e s a is ics on money, p ices and ou pu in
Pakis an om 1992 o 2010 is discussed in Sec ion
3. Sec ion 4 deals wi h me hodology and da a. The
empi ical esul s on he e ec s o mone a y policy on
money and c edi a e analyzed in sec ion 5. Sec ion 6
con ains concluding ema ks and policy ecommen-
da ion.
2. 2.
Li e a u e Re iewLi e a u e Re iew
The basic assump ion o he in e es a e channel
is ha inancial ma ke s a e pe ec ly compe i i e
and wo k e icien ly. Kamin e al. (1998) a gued ha
inancial ma ke s a e so poo ly de eloped especially
in eme ging and unde de eloped economies ha he
quan i y o c edi and i s p ice became a signi ican ool
o mone a y policy. C edi channel is an enhancemen
mechanism co e ing a se o ac o s in ansmi ing
and ampli ying he in e es a e e ec , i is no an
independen channel (Be nanke & Ge le , 1995).
Ex e nal inance p emium is he di e ence be ween
unds aised in e nally and ex e nally, he e ec s o
mone a y policy on in e es a e a e enhanced by
endogenous changes in he ex e nal inance p emium.
Mishkin (1995) a gued ha size o he ex e nal
inance p emium is a ec ed by he agency p oblems
and e eals impe ec ions in he inancial ma ke s.
Be nanke and Ge le (1995) epo ed ha cen al
bank in he c edi ma ke can in luence he ex e nal
inance p emium h ough wo possible channels i.e.
bank lending channel and balance shee channel.
Acco ding o Be nanke and Ge le (1995), he
e ec o policy made ac ions on he supply o bank
c edi is he ocus o he bank lending channel.
Kashyap and S ein (1994) a gued ha bank lending
channel o igina ed in he loanable und heo y (Roosa,
1951; Blinde & S igli z, 1983), and he ex ension o
he IS-LM model o Be nanke and Blinde (1988).
Acco ding o Be nanke (1983), a se e e inancial
slump con e ed in o a p olonged dep ession in 1929-
30 due o he cos o in e media ion and inc eases in
in o ma ion asymme y ollowed by c edi squeeze
on agg ega e demand. Banks play a cen al ole in he
economy acco ding o Ge le and Gilch is (1993) no
only h ough issuing liabili ies, bu also by means o
c ea ing asse s whose nea subs i u e does no exis .
The ocus o balance shee channel is on he
impac o a change in mone a y policy and e ec s
on bo owe ’s balance shee s and income s a emen
as well as a iables such as bo owe ’s cash low, ne
wo h and liquid asse s, i is also called as “b oad c edi
channel” o “ inancial accele a o ”. Fu he mo e, in
addi ion o i ms, he balance shee channel can also
be applied o he consume spending, whe e he abili y
o he bo owe o ob ain loans o consump ion and
in es men is di ec ly ela ed o he ex e nal inance
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E ec i eness o Mone a y Policy on Money and C edi in Pakis an
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p emium (Be nanke & Ge le , 1995). Asymme ic
in o ma ion in he c edi ma ke leads o ad e se
selec ion and mo al haza d p oblems (Be nanke &
Ge le , 1995; Mishkin, 1995).
Acco ding o Be nanke and Ge le (1995)
and Ku ne and Mosse (2002), he in o ma ion
asymme y in he c edi ma ke inc eases p emiums
and dec eases in es men which leads o a decline
in ou pu . Theo e ical models o Be nanke and
Ge le (1989), Be nanke e al. (1999), G eenwald
and S igli z (1993), and Kiyo aki and Moo e
(1997) desc ibe he ampli ica ion and ansmission
mechanism in a dynamic con ex in which mino
mone a y dis u bances ha e eal pe sis en e ec s.
These heo e ical models explain ha in es men is
dependen on he alue o colla e al, a e a mone a y
shock i can cause ampli ica ion and pe sis en eal
e ec s (Bean e al., 2002). Quan i a i ely balance shee
channel is s onge because i leads o di e ences in
he i m’s inancial heal h and cos o capi al.
VAR is conside ed as a s anda d me hod o measu e
he mone a y policy (Sims, 1980; 1992; Be nanke &
Blinde , 1992). Low dimension is one o he majo
sho coming o VAR model which means ha a iable
ha can be included in he VAR model is no oo la ge
(Be nanke e al., 2005; Senbe , 2008; Blaes, 2009).
Be nanke e al. (2005) discussed ha low dimensional
VAR model causes a leas h ee majo p oblems;
in o ma ion se co e ed by a iable in VAR/SVAR
model is much less han he in o ma ion a ailable o
policy make s ha ’s why con amina ed policy shocks
p e ail, secondly speci ic a iable (e.g. IPI) is used
o depic some heo e ical cons uc s; and hi dly
impulse esponse unc ion can only be es ima ed
o he a iables which has included in he VAR/
SVAR model. Be nanke e al. (2005) p oposed Fac o
Augmen ed Vec o Au o eg essi e (FAVAR) model
o sol e he main sho coming o he s anda d VAR.
FAVAR model gi es mo e accu a e esul s as compa ed
o simple VAR model (Be nanke e al., 2005; Lagana
and Moun o d, 2005; Shibamo o, 2007; Senbe , 2008;
Soa es, 2011; Kabundi and Ngwenya, 2011; Muni and
Qayyum, 2014, Muni , 2018).
The e a e ew s udies which measu e he e ec s o
mone a y policy in Pakis an, and specially, on money
and c edi . Agha e al. (2005) examined he channels
o mone a y policy as well as ansmission mechanism
o mone a y policy in Pakis an om 1996 o 2004 by
using VAR me hod. Resul s showed ha mos e ec i e
channel is bank lending channel in Pakis an. Alam
and Waheed (2006) analyzed he associa ion among
sec o al ou pu and mone a y policy. Qua e ly ime
se ies da a o Pakis an had been used om 1973 o
2003 by using VAR model. Resul s showed ha in
sho un mone a y policy has eal e ec s on he
economy and he sec o s which depend on bank loan
a e a ec ed mo e by igh ening o mone a y policy.
Ahmad and Qayyum (2008) analyzed he impac
o go e nmen spending and mac oeconomic
luc ua ion on p i a e ixed in es men in se ices
sec o o Pakis an om 1972 o 2005.
Resul s depic ed ha in e es a e and inc ease in
go e nmen cu en spending lead o dec ease in
p i a e in es men , while p i a e in es men espond
nega i ely o mac oeconomic ins abili y and ola ili y.
Muni and Qayyum (2014) analyzed he associa ion
among mone a y policy and mac oeconomic a iables
in Pakis an. They ound ha FAVAR model is be e
han he s anda d VAR model and explain he e ec s
o mone a y policy which a e consis en wi h heo y.
Muni (2018) analyzed he impac o mone a y policy
on ou pu and p ices in Pakis an a disagg ega e le el.
Resul s showed ha ou pu and p ices show s ong
he e ogenei y in Pakis an, as well as in he sho un
mone a y policy has eal e ec s, while in e es a e
in luences he p ices nega i ely wi h he e ogeneous
e ec s. The e a e ew s udies on he e ec i eness o he
mone a y policy on he money and c edi in Pakis an.
The e o e, i is essen ial o analyze he impac o
mone a y policy on money and c edi in Pakis an in a
da a ich en i onmen .
3. Money, Ou pu and P ices in Pakis an3. Money, Ou pu and P ices in Pakis an
In 1990, inancial sec o and mone a y policy egime
unde go he conside able changes in Pakis an wi h
majo ocus on he libe aliza ion. P io o 1990, S a e
Bank o Pakis an (SBP) used o conduc mone a y
policy by applying mos ly he di ec ins umen s,
while wi h he mo e owa ds he libe alized mone-
a y egime he SBP began o use he indi ec ins u-
men s. Since hen, a numbe o policy changes had
been done o indi ec mone a y managemen (SBP,
2002). Since 1990, a ious s eps ha e been unde -
aken o s eng hen and libe alize he banking sec o ,
165 Kashi Muni
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Vol. 14 Issue 2 162-1812020
including p i a iza ion o comme cial banks.
Table 1 p o ides basic s a is ics on ac ual and a -
ge ed GDP g ow h a e, M2 g ow h a e, and in la-
ion om 1991 o 2010. Du ing his phase, ac ual
in la ion ouched i s highes le el (20.8 pe cen ) in
2008-09, and emains in wo digi s om 1990-91 o
1996-97 and hen g adually slow down and each i s
lowes le el (3.1) in 2002-03 and hen again goes o
wo digi s om 2007-08 o 2009-10. The ac ual in la-
ion emains highe han he a ge ed in la ion om
1990-91 o 1996-97, while om 1997-98 o 2002-03
he a ge ed in la ion emains highe han he ac ual
in la ion and om 2003-04 o 2009-10 in la ion goes
unb idled and emains highe han he a ge . This
in la ion episode shows some in e es ing ac s abou
he e ec i eness o mone a y policy. Ini ially mon-
e a y policy emains ine ec i e o con ol in la ion
hen i achie es i s goals and in la ion emains un-
de con ol and a e 2003-04 i emains ine ec i e
o cu b he in la iona y spi al in he economy and
in la ion ouches i s highes le el e e (i.e. 20.8%) in
2008-09.
Ac ual g ow h a e o GDP also ouched i s high-
es le el in his phase (i.e. 9 pe cen ) in 2004-05. The
ac ual g ow h a e o GDP emains highe han he
a ge ed g ow h a e o GDP in 1990-91 and 1991-
92, while om 1992-93 o 2001-02 he a ge ed
g ow h a e o GDP emains highe han he ac ual
g ow h a e o GDP, excep in 1995-96 and om
2002-03 o 2004-05 he ac ual g ow h a e o GDP
emains highe han he a ge ed, while a e 2004-
05 i emains on a declining end. This episode o
GDP g ow h a e shows he e ec i eness o policies
in Pakis an, especially he mone a y policy, which
emains o ally ine ec i e o achie e i s goals. The
ques ion emains unanswe ed ha why g ow h a e
has pe sis en ly declined and in la ion ouched new
heigh s, why mone a y policy is no e ec i e o ei-
he con ol in la ion o o inc ease g ow h a e. Fig-
u e 1 is showing c edi o p i a e sec o (billion Rs.),
Figu e 1. C edi o p i a e sec o (le el & g ow h) and discoun a e (1992-2010).

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166
E ec i eness o Mone a y Policy on Money and C edi in Pakis an
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Yea M2 G ow h Ra e GDP G ow h Ra e In la ion
Ac ual Ta ge Ac ual Ta ge Ac ual Ta ge
1990-91 17.4 10.8 5.6 5.5 12.7 13
1991-92 26.2 12.9 7.7 6.7 10.6 7
1992-93 17.8 9.2 2.3 6.2 9.8 9.5
1993-94 18.1 14.03 4.5 7.5 11.3 7
1994-95 17.2 11.15 4.1 6.9 13 7
1995-96 13.8 13 6.6 6.5 10.8 9.5
1996-97 12.2 12.36 1.7 6.3 11.8 8.5
1997-98 14.5 14.24 3.5 6 7.8 9
1998-99 6.2 13.64 4.2 6 5.7 8
1999-00 9.4 9.44 3.9 5 3.6 8
2000-01 9 10.5 2.9 5 4.4 4.5
2001-02 15.4 9.5 3.1 4 3.5 5
2002-03 18 10.8 4.7 4.5 3.1 4
2003-04 19.6 11.1 7.5 5.3 4.6 4
2004-05 19.3 11.3 9 6.6 9.3 5
2005-06 15.2 12.8 5.8 7 7.9 8
2006-07 19 13.5 6.8 7 7.8 6.5
2007-08 15.3 13.7 3.7 7.2 12 6.5
2008-09 9.6 14 1.7 5.5 20.8 11
2009-10 12.5 - 3.8 3.3 11.7 9
Table 1. Ac ual and Ta ge ed G ow h Ra e o Money, Ou pu and P ices (1991-2010)
167 Kashi Muni
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Vol. 14 Issue 2 162-1812020
i s g ow h a e and discoun a e om 1992 Janua y
o 2010 Decembe . An inc ease in in e es a e dis-
cou ages c edi and i leads o a decline in in es men
in he economy, which slows down he economic ac-
i i ies. Discoun a e shows an ini ial inc ease up o
1998 and hen ollows a declining end ill 2005 and
hen i shows a g adual inc ease a e ha . C edi o
p i a e sec o shows a majo decline in 2005 wi h
an inc ease in discoun a e and hen g ow h a e
o c edi o p i a e sec o mainly emains nega i e
which is showing he squeeze o p i a e sec o and
ha is he pe iod when g ow h a e o GDP also s a
alling and p ices s a inc easing.
F om he abo e able and igu e, i is clea ha
c edi o p i a e sec o is di ec ly ela ed o g ow h
a e o GDP. SBP is ollowing igh mone a y policy
since 2005 o cu b he in la iona y spi al, bu i dis-
cou ages he c edi o p i a e sec o , which slows
down he economic ac i i ies in he economy and
pu s p essu e on p ices. Thus, p ices go highe un-
b idled e en a e he igh ening o mone a y policy
in Pakis an.
4. Me hodology and Da a4. Me hodology and Da a
Le , ec o Y (M×1) de e mines he dynamic o
economy by assuming M small numbe o obse -
able economic a iables. Howe e , u he eco-
nomic da a ha is no included in he model may
be ele an o he dynamics o Y
. Assume a ec o
X
(N×1) consis s o a la ge numbe o s a iona y
a iables and Y
is a subse o X
. Le K is a small
numbe o unobse ed ac o s F
(K×1), ob ained
by comp essing X
. Following ansi ion equa ion
can be ep esen ed by join dynamics o F
and Y
as:
(1)
Whe e, is a ma ix
o con o mable lag polynomial o ini e o de p in he lag
ope a o , is a ((K+M)×(K+M)) ma ix
o coe icien s and U
is ((K+M)×1) ec o o e o e m
wi h mean ze o and co a iance ma ix Σ
U
. Be nanke e
al. (2005) in e p e ed he unobse ed ac o s as di use
concep s such as economic ac i i y o
c e
di condi ions
ha a e ep esen ed by a la ge numbe o economic se-
ies X
and e med equa ion (1) as FAVAR model. Due
o unobse able ac o s F
, equa ion (1) canno be es i-
ma ed di ec ly. Dynamics o he economy a e explained
by obse able a iable Y
and common o ces such as
ac o s F
. Following obse a ion equa ion depic s he
associa ion among obse ed a iables Y
, unobse able
ac o s F
, and X
as:
(2)
Whe e, K + M << N, F
is a K×1 ec o con aining K
unobse ed ac o s, Λ
is a N×K ma ix o ac o load-
ings, Λ
y
is a N×M ma ix o coe icien s and E
is a N×1
ec o o e o e ms wi h mean ze o and co a iance
ma ix Σ
E
which a e weakly co ela ed. Equa ion (2)
depic s ha bo h Y
and F
ep esen o ces ha d i e
he common dynamics o X
.
Equa ion (1) can be es ima ed as a s anda d VAR i
F
is obse ed, bu his is no possible because ac o s
F
a e unobse able (Hamil on, 1994; Lu kepohl, 2005).
Two s ep p incipal componen p ocedu e o Be nanke
e al. (2005) is ollowed o es ima e he FAVAR model
equa ion (1) and (2). This me hod p o ides a non-
pa ame ic way o unco e ing he space spanned by he
common componen s C
= (F
, Y
) in equa ion (2). An-
o he a ibu e o p incipal componen s is ha i deals
wi h i egula i ies o da a, ha is, X
migh include bo h
qua e ly and mon hly se ies as well as se ies ha ha e
discon inued o ha e missing alues (Be nanke and
Boi in, 2003).
Fi s K+M p incipal componen s o X
a e used o
es ima e he common componen s C
in he i s s ep,
howe e , Y is no conside ed in his s ep. F
is acqui ed
as he pa o space which is no co e ed by Y
bu co -
e ed by C
. O dina y leas squa es (OLS) is used o es-
ima e FAVAR equa ion (1) by eplacing F
wi h F
in
he second s ep. I allows he idiosync a ic e o e m
E
o some deg ee o c oss co ela ion by imposing he
dis ibu ional assump ion (S ock and Wa son, 2002). I
is essen ial o es ima e he s anda d e o s using boo -
s ap p ocedu e o ob ain accu a e con idence in e als
on he impulse esponse because ac o s a e unobse -
able and we a e using es ima ed ac o s. Kilian (1998)
boo s ap p ocedu e is used o accoun o ambigui y in
he ac o s es ima ion.
This s udy uses discoun a e as he mone a y policy
in
s umen . Discoun a e is he o icially announced
ins umen o mone a y policy in Pakis an. E en
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168
E ec i eness o Mone a y Policy on Money and C edi in Pakis an
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hough, he e is no much a ia ion in i , bu a mon h-
ly equency, i has su icien a ia ion o cap u e he
dynamics o he mone a y policy in Pakis an. The e-
o e, inno a ion in he discoun a e can be in e p e ed
as mone a y policy shocks. Mone a y policy shocks
a e iden i ied by ecu si e p ocedu e, all he ac o s
en e ing equa ion (1) espond wi h a lag o change in
he mone a y policy ins umen , which is o de ed las
in he FAVAR model.
An in e media e s ep is equi ed o ob ain he inal
es ima ed ac o s F , unde he ecu si e supposi ion
abou [F , R ] which will en e he FAVAR equa ion.
Final ac o F is ob ained by emo ing he dependen-
cy o C(F , R ) on R and he e o e, he p ocedu e o
Be nanke e al. (2005) is ollowed, ha is, ma ix X is
di ided in o slow and as mo ing a iables. C*(F ) is
measu ed as an es ima e o all common componen s
o he han R by ex ac ing p incipal componen om
slow mo ing a iables which a e e ec ed a e lags by
R . The es ima ed common componen s C(F , R ) a e
eg essed on he obse ed a iables R and he es ima -
ed slow mo ing ac o s C*(F ) as:
(3)
F is es ima ed as
(4)
The VAR in F and R is es ima ed as:
(5)
Recu si e s uc u e is assumed o analyze he mac-
oeconomic shocks whe e he ac o s in Equa ion 5
espond wi h a lag (i.e. do no espond wi hin he same
pe iod – a mon h he e) o an unan icipa ed shock in
mone a y policy. Cholesky decomposi ion is used o
he ecu si e assump ion (Bagliano & Fa e o, 1998;
Ch is iano e al., 1999). This s udy ollows Chokesky
decomposi ion and discoun a e is o de ed las and
and ea i s inno a ions as he policy shocks.
Bai and Ng (2002) me hod is used o de e mine
he numbe o ac o s in many s udies apa om
o he me hods in he li e a u e, howe e , none o
hese me hods conside ha ac o will be included
in he VAR model. The e o e, we ha e es ima ed he
FAVAR model wi h i e ac o s (K=5) and he esul s
a e obus o he use o mo e han i e ac o s (Muni
& Qayyum, 2014). Muni and Qayyum (2014) a gued
ha heo y is consis en wi h FAVAR model wi h i e
ac o s as compa ed o o he speci ica ions o FAVAR
model in Pakis an. Likelihood a io (LR) es is used
o lag selec ion in his s udy. Howe e , his s udy uses
mon hly da a, he e o e, o include wel e lags is ap-
p op ia e o encoun e he p oblem o au oco ela ion.
Dynamic e ec s o s uc u al shocks on mac oeco-
nomic a iable a e de e mined by impulse esponse
unc ion. The impulse esponse o he es ima ed ac-
o s and he a iables obse ed included in Y can be
compu ed om Equa ion 5 as:
(6)
whe e,
By using he es ima o o X in equa ion (2)
(7)
The impulse esponse unc ion o each a iable included
in X
can be compu ed by using he equa ion (6) and (7)
as:
(8)
Using he equa ion (6), he impulse esponse unc ion
o each a iable included in X can be compu ed as:
(9)
This s udy uses 115 mac oeconomic a iables o
169 Kashi Muni
10.5709/ce.1897-9254.338DOI: CONTEMPORARY ECONOMICS
Vol. 14 Issue 2 162-1812020
Pakis an om Janua y 1992 o Decembe 2010 a
mon hly equency. Majo sou ces o da a include
Pakis an Bu eau o S a is ics, S a e Bank o Pakis an,
and In e na ional Financial S a is ics (IFS). The da a
has been p ocessed in he ollowing way: Fi s ly, all he
se ies a e seasonally adjus ed. Secondly, i is assumed
ha all he a iables included in X a e s a iona y,
he e o e all he a iables a e subjec o uni oo es
and non-s a iona y se ies ha e been made s a iona y
by aking hei i s o second di e ence. Appendix
p o ides he desc ip ion o he se ies and he ans o -
ma ion applied o he se ies.
5. Resul s5. Resul s
Impulse esponse unc ion shows a 50bp posi i e
shock in mone a y policy (i.e. discoun a e) and i s
impac on money and c edi wi h 90 pe cen con i-
dence in e al based on Kilian (1998). Unde money,
he ollowing o ms o money a e conside ed: M0:
Rese e Money, M1: Na ow Money, and M2: B oad
Money, while in c edi he ollowing a iables a e con-
side ed: C edi o Public Sec o En e p ises (CPSE),
and C edi o P i a e Sec o (CPS).
Figu e 2 shows ha a e a posi i e shock in in e es
a e M0: Rese e Money does no show any signi i-
can esponse. M1: Na ow Money does no show any
signi ican esponse a e a posi i e shock in in e es
a e. Howe e , M2: B oad Money shows declining
end a e a posi i e shock in mone a y policy, each
i s minimum in 26 mon hs and s a e i ing a e 34
mon hs. Figu e 3 shows ha a e a posi i e shock in
in e es a e C edi o Public Sec o En e p ises shows
a declining end a e he shock, eaches i s minimum
in 24 mon hs and shows a e i al a e 38 mon hs.
C edi o P i a e Sec o shows a declining end a e
he igh ening o mone a y policy, each i s minimum
in 28 mon hs and shows e i al a e 36 mon hs. How-
e e , he magni ude o decline o C edi o P i a e Sec-
o is almos double han he magni ude o decline in
C edi o Public Sec o En e p ises (Figu e 3).
M0 and M1 a e no a ec ed by mone a y policy,
while M2 is a good in e media e a ge o mone a y
policy in Pakis an. An inc ease o dec ease in in e -
es a e e ec M2 in e sely, hence mone a y policy
is achie ing i s goals. The ques ion emains i mon-
e a y policy is achie ing i s in e media e a ge hen
wha ’s w ong wi h i s inal a ge ed a iables i.e. s able
g ow h and p ice s abili y and why wi h he igh en-
ing o mone a y policy in la ion is ou o con ol and
economy has mo ed in o he s a e o s ag la ion. One
eason could be ha c edi o p i a e sec o is a ec ed
mo e han M2 a e he igh ening o mone a y policy.
The p i a e sec o is squeezing wi h he inc ease in in-
e es a e, he e o e economic ac i i ies a e declining
and he demand is no mee ing he supply. So, all he
p essu e is bo ne by he p ices o mee he demand
and g ow h is declining pe sis en ly. The o he eason
could be ha iscal sec o is no esponding o he
igh ening o mone a y policy, iscal policy and mon-
e a y policy a e no ha monizing and his scena io
is pushing he economy in o he s a e o s ag la ion.
C edi channel is an impo an channel o mone a y
policy ansmission mechanism in Pakis an (Agha e
al., 2005; Alam & Waheed, 2006). Mone a y au ho i-
ies should conside he impo ance o p i a e sec o
in he economy and he policy should be made ha
does no a ec he c edi needs o he p i a e sec o .
I p i a e sec o did no lou ish in he economy, hen
he economy will no b eak ou o he s a e o s ag la-
ion (Amjad e al., 2011).
Based on he abo e esul s, we can say ha he e -
ec s o mone a y policy a e he e ogeneous on money
and c edi . M0 and M1 do no show any signi ican e-
sponse wi h a posi i e shock in mone a y policy, while
M2 and c edi o public sec o en e p ises dec eases
wi h a posi i e shock in discoun a e bu s a e i -
ing la e . C edi o p i a e sec o is he wo s ic im o
mone a y policy in Pakis an because i dec eases mo e
han M2 a e an inc ease in in e es a e. Mone a y
policy in e sely e ec s c edi o p i a e sec o , which
is he engine o g ow h in de eloping coun ies. An
inc ease in discoun a e encou ages p i a e sec o o
educe in es men s, which e en ually causes p oduc-
ion and employmen o decline. Amjad e al. (2011)
also a gued ha one o he majo eason o s ag la-
ion in Pakis an is igh mone a y policy esul ed in
squeeze o p i a e sec o .
5.1. Va iance Decomposi ion o Money and C edi
Table 2 shows he a iance decomposi ion o M0,
M1, M2, c edi o public sec o en e p ises and
c edi o p i a e sec o . Columns wo o ou o he
able epo he con ibu ion o a shock in mone a y
policy o he a iance o he o ecas e o o each
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176
E ec i eness o Mone a y Policy on Money and C edi in Pakis an
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S.No Va iable
Ou pu
T ans o ma ion Fas /Slow De ail o Va iable
37 PNGS 4 SLOW P oduc ion o Na u al Gas (SA)
38 PELC 4 SLOW P oduc ion o Elec ici y (SA)
S.No Va iable
P ices
T ans o ma ion Fas /Slow De ail o Va iable
39 CPIG 4 SLOW CPI: Gene al (SA)
(Base:2000-2001)
40 CPIFBT 4 SLOW CPI: Food Be e ages and Tobacco (SA)
(Base:2000-2001)
41 CPIAPF 4 SLOW CPI: Appa el ex ile and Foo wea (SA)
(Base:2000-2001)
42 CPIHR 2 SLOW CPI: House Ren (SA)
(Base:2000-2001)
43 CPIFL 4 SLOW CPI: Fuel and Ligh ing (SA)
(Base:2000-2001)
44 CPIHFFE 4 SLOW CPI: Household Fu ni u e and Equipmen (SA)
(Base:2000-2001)
45 CPITC 2 SLOW CPI: T anspo a ion and Communica ion (SA)
(Base:2000-2001)
46 CPIRE 4 SLOW CPI: Rec ea ion and En e ainmen (SA)
(Base:2000-2001)
47 CPICLPA 4 SLOW CPI: Cleaning Laund y and Pe sonal Appea ance
(SA) (Base:2000-2001)
48 WPIG 4 SLOW WPI: Gene al (SA)
(Base:2000-2001)
49 WPIF 4 SLOW WPI: Food (SA)
(Base:2000-2001)
50 WPIRM 4 SLOW WPI: Raw Ma e ial (SA)
(Base:2000-2001)
Table 3. Desc ip ion o Da a (Con inued)

177 Kashi Muni
10.5709/ce.1897-9254.338DOI: CONTEMPORARY ECONOMICS
Vol. 14 Issue 2 162-1812020
S.No Va iable
P ices
T ans o ma ion Fas /Slow De ail o Va iable
51 WPIFLL 2 SLOW WPI: Fuel, Ligh ing and Lub ican s (SA)
(Base:2000-2001)
52 WPIM 4 SLOW WPI: Manu ac u e s (SA)
(Base:2000-2001)
53 WPIBM 4 SLOW WPI: Building Ma e ials (SA)
(Base:2000-2001)
S.No Capi al
Ma ke
T ans o ma ion Fas /Slow De ail o Va iable
54 GIG 4 FAST SBGI: Gene al (SA)
(Base:2000-2001)
55 GICOT 4 FAST SBGI: Co on and O he Tex iles (SA)
(Base:2000-2001)
56 GITS 4 FAST SBGI: Tex ile Spinning (SA)
(Base:2000-2001)
57 GITWC 1 FAST SBGI: Tex ile Wea ing and Composi e (SA)
(Base:2000-2001)
58 GIOT 4 FAST SBGI: O he ex iles (SA)
(Base:2000-2001)
59 GICOP 4 FAST SBGI: Chemical and o he Pha maceu icals(SA)
(Base:2000-2001)
60 GIE 1 FAST SBGI: Enginee ing (SA)
(Base:2000-2001)
61 GIAA 4 FAST SBGI: Au o and Allied (SA)
(Base:2000-2001)
62 GICEG 4 FAST SBGI: Cables and Elec ic Goods (SA)
(Base:2000-2001)
63 GISA 4 FAST SBGI: Suga and Allied(SA)
(Base:2000-2001)
Table 3. Desc ip ion o Da a (Con inued)
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178
E ec i eness o Mone a y Policy on Money and C edi in Pakis an
This wo k is licensed unde a C ea i e Commons A ibu ion 4.0 In e na ional License.
S.No Capi al
Ma ke
T ans o ma ion Fas /Slow De ail o Va iable
64 GIPB 4 FAST SBGI: Pape and Boa d (SA)
(Base:2000-2001)
65 GIC 4 FAST SBGI: Cemen (SA)
(Base:2000-2001)
66 GIFE 4 FAST SBGI: Fuel and Ene gy (SA)
(Base:2000-2001)
67 GITC 1 FAST SBGI: T anspo and Communica ion (SA)
(Base:2000-2001)
68 GIBOFI 4 FAST SBGI: Banks and O he Financial Ins i u ions(SA)
(Base:2000-2001)
69 GIBIC 4 FAST SBGI: Banks and In es men Companies (SA)
(Base:2000-2001)
70 GIMD 1 FAST SBGI: Moda abas (SA)
(Base:2000-2001)
71 GILC 4 FAST SBGI: Leasing Companies (SA)
(Base:2000-2001)
72 GII 1 FAST SBGI: Insu ance (SA)
(Base:2000-2001)
73 GIMQ 4 FAST SBGI: Miscellaneous (SA)
(Base:2000-2001)
74 GIJ 4 FAST SBGI: Ju e (SA)
(Base:2000-2001)
75 GIFA 4 FAST SBGI: Food and Allied (SA)
(Base:2000-2001)
76 GIGC 4 FAST SBGI: Glass and Ce amics (SA)
(Base:2000-2001)
77 GIVA 4 FAST SBGI: Vanaspa i and Allied (SA)
(Base:2000-2001)
Table 3. Desc ip ion o Da a (Con inued)
179 Kashi Muni
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Vol. 14 Issue 2 162-1812020
S.No Capi al
Ma ke
T ans o ma ion Fas /Slow De ail o Va iable
78 GIO 4 FAST SBGI: O he s (SA)
(Base:2000-2001)
79 SIG 4 FAST SBSI: Gene al (SA)
(Base:2000-2001)
80 SICOT 4FAST SBSI: Co on and O he Tex iles (SA)
(Base:2000-2001)
81 SICOP 4FAST SBSI: Chemical and o he Pha maceu icals (SA)
(Base:2000-2001)
82 SIE 4 FAST SSBSI: Enginee ing (SA)
(Base:2000-2001)
83 SIAA 4 FAST SBSI: Au o and Allied (SA)
(Base:2000-2001)
84 SICEG 1 FAST SBSI: Cables and Elec ic Goods (SA)
(Base:2000-2001)
85 SISA 4 FAST SBSI: Suga and Allied (SA)
(Base:2000-2001)
86 SIPB 4 FAST SBSI: Pape and Boa d (SA)
(Base:2000-2001)
87 SIC 1 FAST SBSI: Cemen (SA)
(Base:2000-2001)
88 SIFE 4 FAST SBSI: Fuel and Ene gy (SA)
(Base:2000-2001)
89 SITC 4 FAST SBSI: T anspo and Communica ion (SA)
(Base:2000-2001)
90 SIBOFI 4 FAST SBSI: Banks and O he Financial Ins i u ions(SA)
(Base:2000-2001)
91 SIMQ 4 FAST SBSI: Miscellaneous (SA)
(Base:2000-2001)
Table 3. Desc ip ion o Da a (Con inued)
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180
E ec i eness o Mone a y Policy on Money and C edi in Pakis an
This wo k is licensed unde a C ea i e Commons A ibu ion 4.0 In e na ional License.
S.No In e es
Ra e
T ans o ma ion Fas /Slow De ail o Va iable
92 DISR 1 FAST Discoun a e (NSA)
93 CMR 2 FAST Call money Ra e (NSA)
94 GTB6m 2 FAST 6-mon h Go . T easu y Bill Ra e (NSA)
95 GBY 2 FAST Go . Bond Yield (NSA)
S.No Money &
C edi
T ans o ma ion Fas /Slow De ail o Va iable
96 M0 4 FAST M0 : Rese e Money (SA)
97 M1 4 FAST M1 : Na ow Money (SA)
98 M2 4 FAST M2 : B oad Money (SA)
99 CPSE 4 FAST C edi o Public Sec o En e p ises (SA)
100 CPS 4 FAST C edi o P i a e Sec o (SA)
S.No Ex e nal
Sec o
T ans o ma ion Fas /Slow De ail o Va iable
101 EXRUSA 4 FAST Exchange Ra e USA, Rs/$ (NSA)
102 NEER 4 FAST Nominal E ec i e Exchange Ra e (NSA)
103 REER 1 FAST Real E ec i e Exchange Ra e (NSA)
104 RSDRH 2 FAST (Base:2005)
105 RFEX 4 FAST Rese e: SDR Holding (SA)
106 RGLD 4 FAST Rese e: Fo eign Exchange (SA)
107 ITI 4 SLOW Rese e: Gold (SA)
108 ICNM 4 SLOW To al Impo s (SA)
109 IRMCNG 2 SLOW Impo s o Raw ma e ial Consume Goods (SA)
110 IRMCPG 4 SLOW Impo s o Raw ma e ial Capi al Goods (SA)
Table 3. Desc ip ion o Da a (Con inued)
181 Kashi Muni
10.5709/ce.1897-9254.338DOI: CONTEMPORARY ECONOMICS
Vol. 14 Issue 2 162-1812020
S.No Ex e nal
Sec o
T ans o ma ion Fas /Slow De ail o Va iable
111 ICPG 4 SLOW Impo s o Capi al Goods (SA)
112 ETE 2 SLOW To al Expo s (SA)
113 EPRC 2SLOW Expo o P ima y Commodi ies (SA)
114 ESM 4SLOW Expo o Semi Manu ac u es (SA)
115 EMG 2SLOW Expo o Manu ac u ed Goods (SA)
Table 3. Desc ip ion o Da a (Con inued)