Volatility of Monetary Policy on Inflaction and Investment in Pakistan

Abstract

The economy of Pakistan under development largely relies on the influence the monetary policy exerts to macroeconomic stability condið€†Ÿons. Scholarly interest in the monetary environment of Pakistan has been keen on the significant disrupð€†Ÿons that have prevailed over the past decades and has also been of a broad character in that has equally dealt with issues related to inflað€†Ÿon rates as well capital investments. Gaps have developed across the economic environment due to unpredictable central bank acð€†Ÿons and inconsistent interest rates because of varying money supply to offer monetary policy volað€†Ÿlity. The empirical literature has paid limited að€†©enð€†Ÿon to the role of monetary policy in Pakistan to measure its volað€†Ÿlity impacts on investment and inflað€†Ÿon behavior. The main objecð€†Ÿve of this research is to determine the magnitude of impact volað€†Ÿlity in monetary policy has on inflað€†Ÿon and investment dynamics in the country. It að€†©empts to give a descripð€†Ÿve view of how macroeconomic uncertainty created through errað€†Ÿc policy measures interfere with inflað€†Ÿonary pressures and investment decisions in an emerging economy. To achieve these objecð€†Ÿves, the study uses a quanð€†Ÿtað€†Ÿve research design and secondary ð€†Ÿme-series data over the last two decades. Econometric analysis employs the GARCH (Generalized Autoregressive Condið€†Ÿonal Heteroskedasð€†Ÿcity) model to test for volað€†Ÿlity while regression analysis is applied to test the relað€†Ÿonship between monetary policy volað€†Ÿlity, inflað€†Ÿon and investment. The unit root test and the stað€†Ÿonarity diagnosð€†Ÿcs are also used to make the data valid. Important findings indicate that level of monetary policy volað€†Ÿlity has a stað€†Ÿsð€†Ÿcally significant effect on both inflað€†Ÿon and investment in Pakistan. More precisely, higher levels of policy uncertainty are associated with higher inflað€†Ÿon and lower private investment, the destabilizing effects of which are magnified by the fluctuað€†Ÿon of policy measures. These results highlight the need of a stable, predictable, monetary framework for economic growth and for price stability. This study adds to the wider literature by presenð€†Ÿng empirical evidence on Pakistan’s monetary environment and suggesð€†Ÿons acð€†Ÿonable for policymakers to achieve longterm economic stability through consistent and transparent policy alignment.