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Monetary Policy and Gdp

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Submitted By hajisaifullah
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DOES MONETARY POLICY INFLUENCE ECONOMIC GROWTH IN PAKISTAN?

Haji Saif Ullah (Author)
Email: hajisaif@live.com
Muhammad Ashraf (coordinator)
Department of Management Sciences
University Of Gujrat, Gujrat

ABSTRACT
This study examines the impact of monetary policy on economic growth in Pakistan. The study uses time-series data covering the range of 1991 to 2011.The effects of stochastic shocks of each of the endogenous variables are explored using Error Correction Model (ECM). The study shows that Long run relationship exists among the variables. Also, the core finding of this study shows that inflation rate, exchange rate and external reserve are significant monetary policy instruments that drive growth in Pakistan. It is therefore recommended that the establishment of primary and secondary government bond markets that can also increase the efficiency of monetary policy and reduce the government’s need to rely on the central bank for direct financing.
Keywords: Policy instruments, Economic Growth, GDP, Money supply, monetary policy
INTRODUCTION
The aim of this study is to examine the impact of monetary policy on economic growth. Economic growth is an important macroeconomic objective for any country. Monetary policy has direct relation with economic growth. Folawewo and Osinubi (2006) stated monetary policy as the arrangements which are planned to control supply of money in a country. In many countries the basic aims of the monetary policy are to stabilize prices, keep the balance of payment equal, promote the employment and increase in economic development.
Since the foundation of State Bank of Pakistan (SBP) in 1948 it has playing its role to stabilize economic growth through monetary policy. The main purpose of monetary policy in Pakistan as described in the State Bank of Pakistan Act 1956 is to attain steady growth and control on inflation. In

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