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This book states identification conditions to reveal the dynamic
effects of monetary policy shocks on the non-policy variables for
Pakistan. It finds that increase in money has generated unusual
inflationary episodes. The results confirm remarkable differences
in the monetary policy transmission mechanism. The Central Bank can
exercise an effective control on inflation by adjusting output
growth forecasts in the middle of the three threshold periods
identified in this study. The monetary authority mainly relies on
encouraging demand and supply shocks to restore inflation to its
desired long-run level. This analysis implies that only a small
proportion of the observed repetitive variation is attributable to
random variation in policy and the real policy effect is smaller
than usual belief. Pakistan's experience with monetary policy
supports the existence of the so-called Price Puzzle. This analysis
also shows that interest rate based policy has been much more
sensitive to exogenous shocks; responding not only to current or
lagged inflation but also to expected inflation and output
stability.
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