Global Uncertainty and Monetary Policy Effectiveness in Pakistan

This article investigates monetary policy effectiveness in Pakistan in the presence of external uncertainties stemming from the economic growth of developed economies and international oil price movements. We estimate a structural VAR model to gauge the impact of international oil prices and global demand on key macroeconomic variables in Pakistan. Our findings suggest that monetary policy remains an effective tool for controlling inflation. An increase in oil prices (supply shock) leads to higher real policy rates, real exchange rate depreciation, an economic growth slowdown and rising inflation. A global demand surge leads to higher real policy rates, real exchange rate appreciation, economic growth and rising inflation. Real policy rates adjust upward in response to inflation and real exchange rate shocks. The real exchange rate depreciates if inflation increases. This indicates that the monetary authorities in Pakistan are generally able to stabilize consumer prices and real exchange rates in the economy.