Impact of Monetary Policy on Economic Growth in Pakistan Economy

Abstract

Monetary policy aims to contribute to economic growth and stability in the economy. This policy also makes a balanced demand and supply by maintaining the domestic prices and exchange rate to decrease inflation, shapes the pattern of investment and production, and increases the financial institutions to manage the debt services very efficiently. The study analyzes how monetary policy affects inflation in a country. The Data sources are WDI and the State Bank of Pakistan from 1981 to 2014. The current study used Inflation rate as a dependent variable while independent variables of liquidity ratio, broad money supply and reserve ratio were used as independent variables. The study used ADF test to check the stationary of the variables used in the model. Data analysis was done by using the ARDL model. The findings highlight that monetary policy indicated by money supply shows a positive effect on the rate of inflation. Result also shows that the reserve ratio increases inflation in the economy. The study results suggest that monetary policy must provide a favorable atmosphere for investment by providing reasonable interest rates and liquidity management mechanisms.