The Price Puzzle and Monetary Policy Transmission Mechanism in Pakistan: Structural Vector Autoregressive Approach

This paper addresses the issue of monetary policy effectiveness, the price puzzle, and the positive response of prices to monetary tightening in Pakistan. The study examines the effects of the monetary policy shock on the price level and other macroeconomic variables such as output, exchange rate, and money supply within the structural VAR framework over the period 1992: M1 to 2010:M08. We find that a contractionary monetary policy shock has a positive effect on prices and the output increase over some horizon following the monetary tightening, but continuously falls after initial rise. The results also indicate that monetary contractions in Pakistan, over the period reviewed, are associated with the persistent depreciation of domestic currency value relative to the US dollar