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Effectiveness of Monetary Policy in Controlling Inflation during Normal and Crisis Periods: An ARDL Analysis for Pakistan

Introduction

Effectiveness of monetary policy in controlling inflation during normal and crisis periods: an ardl analysis for pakistan. Examine Pakistan's monetary policy effectiveness in controlling inflation (2000-2024) using ARDL. Discover how policy rates and exchange rates impact inflation during normal and crisis periods.

Abstract

This paper examines how well monetary policy has worked to limit inflation in Pakistan between 2000 and 2024, considering the COVID-19 epidemic and the global financial crisis of 2008. The autoregressive distributed lag (ARDL) framework is used to evaluate the dynamics in the short and long term. The findings highlight the monetary policy rate's function as a key policy tool by showing that it significantly reduces inflation over the long term. Both the currency rate and the policy rate have a major impact on inflation in the short term, with the latter having long lasting consequences due to its delayed term. The error correction term corrects 77% of the disequilibrium per year, indicating a quick rate of adjustment. Stability tests verify parameter constancy during times of crisis, while diagnostic tests verify the lack of heteroscedasticity, autocorrelation, and non-normality. The main goals of policy recommendations are to improve the efficiency of money supply mechanisms, control exchange rate volatility, and strengthen interest rate transmission.

Review

This paper addresses a highly pertinent topic, investigating the effectiveness of monetary policy in controlling inflation in Pakistan, a developing economy often grappling with macroeconomic instability. The study's scope, covering 2000-2024 and explicitly accounting for the 2008 global financial crisis and the COVID-19 pandemic, adds valuable context to the analysis. The authors appropriately employ the Autoregressive Distributed Lag (ARDL) framework, which is well-suited for analyzing cointegration and short-run/long-run dynamics, especially with mixed integration orders. A key strength lies in its clear finding that the monetary policy rate serves as a significant tool for inflation reduction in the long run, thereby offering crucial insights for policymakers. The abstract effectively highlights several important findings. The distinction between short-run impacts (where both the policy rate and exchange rate play a role) and the long-run dominance of the policy rate is particularly insightful. The reported error correction term of 77% per year suggests a remarkably fast adjustment towards equilibrium, which warrants further exploration regarding the underlying mechanisms in Pakistan's economic structure. While stability tests are noted to verify parameter constancy during crisis periods, the abstract could benefit from briefly clarifying how these crisis periods were specifically integrated or interacted with within the ARDL model beyond simple period coverage, ensuring the claimed 'effectiveness during crisis periods' is robustly captured. The mention of the policy rate having long-lasting consequences due to its "delayed term" is an interesting observation that could be elaborated on in the full paper, perhaps by discussing specific lag structures or transmission channels. The paper's policy recommendations, focusing on enhancing money supply mechanisms, managing exchange rate volatility, and strengthening interest rate transmission, are directly derived from the findings and are highly relevant for Pakistan's economic management. By providing a comprehensive analysis for a specific emerging market and incorporating distinct crisis periods, the study makes a meaningful contribution to the empirical literature on monetary policy effectiveness. The rigorous diagnostic and stability tests mentioned in the abstract bolster confidence in the reported results. Overall, this paper presents a well-structured and empirically sound analysis with valuable policy implications, making it a strong candidate for publication.

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