Abstract:
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.
