Impact of Monetary Policy on Inflation and Investment in Pakistan: A Time Series Analysis

Abstract

Purpose: This study aims to explore the impact of monetary policy on inflation and investment in Pakistan.
 Methodology: Our study employs the Autoregressive distributed lag model (ARDL) over the time of 1972 to 2019.
 Findings: The empirical findings show that in the long-run impact of money supply has significant and positive on investment and other variables trade, foreign direct investment, gross domestic saving, services are also positively associated with the investment. While other variables interest rate and exchange rate negatively linked with investment. Empirical findings of the second econometric model show the core variable money supply has a significant and positive on inflation including other variables foreign direct investment, exchange rate, exports and government expenditures on education but other variables interest rate, gross domestic saving and agriculture output negatively linked with inflation.
 Implications: The study indicates that a stable monetary policy should be introduced to improve a country's economic development. Monetary policy should be used to build an agreeable environment of uncertainty that draws both domestic and outside investors to promote economic growth. Economic growth can be accomplished by encouraging efficient monetary policy steps for inflation stability and attractive interest rates.

Relative responses of trade in goods and services to currency devaluation: Evidence from Ethiopia

“…This is especially true in Ethiopia, where the government uses strategies to increase imports during periods of high inflation by either engaging directly in import activities (such as importing sugar, food oil, wheat, and related items) or by creating favorable conditions for the private sector to import the necessary goods, such as by setting up the forex. Likewise, inflation may restrict the volume of goods available for exports by encouraging exporters to sell their goods domestically or by increasing the cost of exportable goods in the international market [ [47] , [48] , [49] ]. This predicament is particularly significant for nations that export basic goods such as food and whose macroeconomic conditions are unstable.…”

Analyzing the Impact of Monetory Policy Shocks on Output, Inflation and Exchange Rate Dynamics of Pakistan

“…Gillani et al, (2021) documented that monetary policy shapes economy by reducing inflation, balancing supply and demand and there by influencing investment in the economy. Chaudhry et al, (2021) found that over long term monetary policy have positive effect on foreign direct investment, savings and investment. Alam and Waheed (2006), examined the impact of monetary policy on different sectors of the economy by using quarterly data spanning from first quarter of 1973 to last quarter of 2003.…”