MONETARY POLICY AND ASSET PRICES: THE CASE OF PAKISTAN

Abstract

This paper sets the objective of estimating the mediating role of asset prices in the transmission of monetary policy. Vector autoregressive model comprising short-term interest rate, output, inflation and asset prices has been estimated using data of Pakistan economy for the period 2000m01 to 2019m06. We find significant role of asset prices in transmission of monetary policy to target variables, especially when individual asset prices are taken instead of asset price index. Stock prices are found important mediator of transmission from interest rate to output while exchange rate is so for inflation rate; role of house prices remains moderate.