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On The Response Of Economic Aggregates To Monetary Policy Shocks

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Executive Summary

This paper empirically investigates how shocks to monetary policy measures (short-term nominal interest rate and broad money supply) affect economic aggregates: output growth, price levels and nominal exchange rate. The study is carried out for Pakistan using quarterly data covering the period from 1980 to 2009. In doing this, Johansen's (1988) co integration technique and vector error correction model are applied to explore the long-run relationship among the variables. The authors find significant evidence on the existence of a long-run stable relationship between this monetary measures and economic aggregates. The Impulse Response Functions (IRFs) are computed to examine the response of each macroeconomic variable to a standard deviation shock to monetary measures.

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