Whether Monetary Policy Shocks Have Symmetric or Asymmetric Effect on Price Level: A Time Series Analysis of Pakistan

Abstract

The current study worked on the symmetric or asymmetric nature of monetary policy variable on general price level in Pakistan. Time series data of fifty-year starting from 1972 reveals that the relation is symmetric. The expansionary monetary policy leads to higher inflation in the same magnitude as the contractionary monetary policy decreases the price level. This result was derived first by employing Autoregressive Distributive Lag technique for checking relation in the long run among the variables.  The autoregressive distributive lag technique shows linear relationship hence there was a need for asymmetry analysis. therefore, Nonlinear Autoregressive Distributive Lag technique was used. Which justified the linear and symmetric relation of money supply and inflation in Pakistan. while there are possibilities of degenerate cases. To solve the issue an additional F test was conducted. For this purpose, the current study used Augmented Autoregressive Distributive Lag test. Which supported the idea of long run relationship with F-value to be higher than the value of upper bound. To counter the effect of fiscal side government consumption expenditure was taken into account but this proxy came out to be insignificant. The study further found that Increase in GDP decreases inflation and imports contribute positively to inflation in Pakistan. Through WALD test the symmetric nature of the relationship is justified.