Munir, Kashif and Qayyum, Abdul (2012): Measuring the effects of monetary policy in Pakistan: A factor augmented vector autoregressive approach.
Download (252kB) | Preview
This paper examines the effects of monetary policy in Pakistan economy using a data rich environment. We used the Factor Augmented Vector Autoregressive (FAVAR) methodology, which contains 115 monthly variables for the period 1992:01 to 2010:12. We compare the results of VAR and FAVAR model and the results showed that FAVAR model explains the effects of monetary policy which are consistent with theory and better than VAR model. VAR model shows the existence of price puzzle and liquidity puzzle in Pakistan while FAVAR model did not provide any evidence of puzzles. FAVAR model supports the effectiveness of interest rate channel in Pakistan.
|Item Type:||MPRA Paper|
|Original Title:||Measuring the effects of monetary policy in Pakistan: A factor augmented vector autoregressive approach|
|Keywords:||Monetary Policy, VAR, FAVAR|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Kashif Munir|
|Date Deposited:||17. Jan 2012 07:05|
|Last Modified:||12. Feb 2013 18:07|
Agha, Asif Idress, Noor Ahmed, Yasir Ali Mubarik, and Hastam Shah. 2005. “Transmission Mechanism of Monetary Policy in Pakistan.” SBP-Research Bulletin 1(1): 1–23.
Bagliano, Fabio C., and Carlo A. Favero. 1998. “Measuring Monetary Policy with VAR Models: An Evaluation.” European Economic Review 42(6): 1069–1112.
Bai, Jushan, and Serena Ng. 2002. “Determining the Number of Factors in Approximate Factor Models.” Econometrica 70(1): 191–221.
Bernanke, Ben S., and Alan S. Blinder. 1992. “The Federal Funds Rate and the Channels of Monetary Transmission.” The American Economic Review 82(4): 901–921.
Bernanke, Ben S., and Jean Boivin. 2003. “Monetary Policy in a Data-Rich Environment.” Journal of Monetary Economics 50(3): 525–546
Bernanke, Ben S., Jean Boivin, and Piotr S. Eliasz. 2005. “Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach.” The Quarterly Journal of Economics 120(1): 387–422.
Blaes, Barno. 2009. “Money and Monetary Policy Transmission in the Euro Area: Evidence from FAVAR and VAR Approaches.” Deutsche Bundesbank Discussion Paper No. 18.
Breitung, Jorg, and Sandra Eickmeier. 2005. “Dynamic Factor Models.” Deutsche Bundesbank Discussion Paper No. 38.
Carvalho, Marina Delmondes, and Jose Luiz Rossi Junior. 2009. “Identification of Monetary Policy Shocks and its Effects: FAVAR Methodology for the Brazilian Economy.” Brazilian Review of Econometrics 29( 2): 285–313
Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans. 1999. “Monetary Policy Shocks: What have We Learned and to What End?” In Handbook of Macroeconomics, edited by John B. Taylor and Michael Woodford, 65–148. Amsterdam: Elsevier.
Hamilton, James D. 1994. Time Series Analysis. New Jersey: Princeton University Press.
Hussain, Karrar. 2009. “Monetary Policy Channels of Pakistan and Their Impact on Real GDP and Inflation.” Center for International Development Graduate Student Working Paper No. 40.
Javid, Muhammad and Kashif Munir. 2011. “The Price Puzzle and Monetary Policy Transmission Mechanism in Pakistan: Structural Vector Autoregressive Approach”, MPRA Paper No. 30670.
Kabundi, Alain, and Nonhlanhla Ngwenya. 2011. “Assessing Monetary Policy in South Africa in a Data-Rich Environment.” South African Journal of Economics 79(1): 91–107.
Khan, Mahmood-ul-Hassan. 2008. “Short Run effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan”, SBP-Research Bulletin 4(1): 1–30.
Kilian, Lutz. 1998. “Small-Sample Confidence Intervals for Impulse Response Functions.” The Review of Economics and Statistics 80(2): 218–230
Lagana, Gianluca, and Andrew Mountford. 2005. “Measuring Monetary Policy in the U.K.: A Factor-Augmented Vector Autoregression Model Approach.” The Manchester School 73(Special Edition): 77–98.
Lutkepohl, Helmut. 2005. New Introduction to Multiple Time Series Analysis. Berlin: Springer-Verlag.
Miyao, Ryuzo. 2002. “The Effects of Monetary Policy in Japan.” Journal of Money, Credit and Banking 34(2): 376–392.
Pakistan Bureau of Statistics. Monthly Bulletin of Statistics. Government of Pakistan (various issues).
Peersman, Gert, and Frank Smets. 2001. “The Monetary Transmission Mechanism in the Euro Area: More Evidence from VAR Analysis.” European Central Bank Working Paper No.91.
Senbet, Dawit. 2008. “Measuring the Impact and International Transmission of Monetary Policy: A factor-Augmented Vector Autoregressive (FAVAR) Approach.” European Journal of Economics, Finance and Administrative Sciences 13: 121–143.
Shibamoto, Masahiko. 2007. “An Analysis Of Monetary Policy Shocks In Japan: A Factor Augmented Vector Autoregressive Approach.” The Japanese Economic Review 58(4): 484–503.
Sims, Christopher A. 1980. “Macroeconomics and Reality.” Econometrica 48(1): 1–48.
Sims, Christopher A. 1992. “Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy.” European Economic Review 36(5): 975–1000.
Soares, Rita. 2011. “Assessing Monetary Policy in the Euro Area: a Factor-Augmented VAR Approach.” Banco de Portugal Working Papers No. 11.
State Bank of Pakistan. Monthly Statistical Bulletin. State Bank of Pakistan (various issues).
Stock, James H., and Mark W. Watson. 2002. “Macroeconomic Forecasting Using Diffusion Indexes.” Journal of Business & Economic Statistics 20(2): 147–162.
Walsh, Carl E. 2010. Monetary Theory and Policy. 3rd ed. Cambridge: MIT Press.