INVESTIGATING THE EFFECTIVENESS OF CHANNELS OF MONETARY TRANSMISSION MECHANISM IN PAKISTAN: AN APPLICATION OF VAR MODEL, IMPULSE RESPONSE FUNCTION AND VARIANCE DECOMPOSITION

Abstract

The study analyzes the various channels of the monetary transmission mechanism in Pakistan. The purpose of the study is to find out the effective channel of the monetary transmission mechanism in Pakistan by using the VAR model, impulse response function and variance decomposition. The study has used annual data from 1972 to 2019. The findings of the study exhibit that the lending channel and exchange rate channel are effective whereas the asset price channel is ineffective in Pakistan. The exchange rate has a strong impact on the determination of output through the exchange rate channel in Pakistan. So, to attain the optimal level of the output, controlling the volatility of the exchange rate may be focused. In the bank lending channel, the lending rate plays a vital role in determining the output level in Pakistan. That’s why banks play an important role in the economy of Pakistan and the banking system may be promoted effectively.