Monetary policy and its impact on real G.D.

P in PAKISTAN Page 1

RESEARCH TOPIC.
MONETARY POLICY AND ITS IMPACT ON REAL GDP IN PAKISTAN
SUBJECT: ADVANCE RESEARCH METHOD

SUBMITTED TO
Mr. Naveed Ahmed


SUBMITTED BY
Muhammad Tariq
(MBD-10-20)
Mansoor Ahmed
(MBD-10-66)

MBA 5
th
morning

BZU SUB CAMPUS DGKHAN








Monetary policy and its impact on real G.D.P in PAKISTAN Page 2

TABLE OF CONTENTS


ABSTRACT __________________________________________________________03
INTRODUCTION______________________________________________________04
1.SCOPE OF STUDY_______________________________________________06
2. RESEARCH OBJECTIVES_______________________________________06
3.RESEARCH QUESTION__________________________________________06
4. LITERATURE REVIEW__________________________________________07

RESEARCH MODEL AND METHODS____________________________________10
DATA COLLECTION___________________________________________________10
DATA ANALYSIS______________________________________________________11
RESULTS AND DISCUSSION____________________________________________11
CONCULION__________________________________________________________13
REFERENCES__________________________________________________________13






























Monetary policy and its impact on real G.D.P in PAKISTAN Page 3

ABSTRACT
This research article provides us the impact of Monetary Policy on GDP. GDP is bieng
independent varriable as to encourge it to go economic growth inby reducing inflation.The five
types of channel monetary policy is used for economic growth .In our research most important
one money supply THE M2 and interest rate is bieng used in pakistan.More money supply is
causing inflation and real gdp is going to down in our research the relation of varriables is being
more important and end rsult by using spss regression and correlation show that increasing in the
quantity of money cuasing inflation but by monetary policy it is being controlled. no
doubt is affected by the Monetary Policy of the state. The research papers of
various authors have been studied in this regard to prove the Hypothesis and after
in depth analysis by applying Regression Analysis technique it has been observed
that the relationship between the two exists. The data of past 30 years of PakistanThe Research
study canfurther be used for developmental projects for the Growth of Economy, Quality
improvements, Household production, the underground economy, Health and life
expectancy, the environment, Political immunity and ethnic justice

















Monetary policy and its impact on real G.D.P in PAKISTAN Page 4


INTRODUCTION
Monetary policy is policy about economic and price stability in any economy.This policy tells
that what rate of interest is operated in the whole economy and how much total quantity of
money supply should be in there in circulation and reserved but seeing the current economic
position and conditions. The main target of monetary policy is to influence economic growth,
inflation, unemloyment, and exchange rate with other currencies.The factor interest rate is the
rate at which loan is borrowed or granted ,In other words it is the cost of credit.The factor total
money supply that is the availability of quantity of money in any economy. As our topic is more
related with monetary policy and its influence on real gdp growth in economy. For economic
growth and price stability any economy real gdp rate should be grown and inflation rate should
be decline.Both have negative relationship in the light of researches.Real gdp rate is the rate of
gdp in any current year minus with the inflation rate. If the case is that gdp rate is less increasing
and inflation rate is more in any economy in any current year then there is less growth , less
porice stability , unemployment rate is high, and currency value is going to decling in case of
international trade. Inflation rate is the rate of general rise in prices in any economy. The
situation is resulted in pakistan there is low growth rate and low stabilization.The situation in
pakistan is alarming that the inflation can be control by monetary policy in short term but in long
term it is not targetting.Real gdp is rmained 2.4 percent during the 2010-11 but inflation rate as
recorded sensitive price indicator from 12% to 18.1% in july 2010-11.In 2011-12 rael gdp is
3.6% from the state bank economic survey. To control this inflation monetary policy using the
following channels in pakistan Money supply , interest rate, credit control,exchange rate and
asset price control rate. In our research the monetary policy and macro economic varriables
relationship is very important specifically real gdp , interest rate ,money supply ,inflation
rate.The two models in equation form expressed in previous researches showing the relationship
between monetary policy and macro economic varriables, and realgdp and inflation rate
respectively considered in the reseach
Monetary policy is the short run way to achieve economic growth and price stability (stabling the
inflation rate, exchange rates with other currencies and unemployment) by authority to
controlling (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of
interest.As monetary policy is set two objectives in pakistan the economic growth and price
stability.The real gdpgrowth and inflation rate is estimated and targeted by pakistan govt and
influencing that target by sbp through monetary It achieves this goal by targeting monetary
aggregates (broad money supply growth as an intermediate target and reserve money as an
operational target.(Shamshad, 2006). Due to dynamic changes in reseach and theories in
economics the monetary policy is going to dynamic in pakistan as economic changes in the
world. The factor money supply in the form of M2 aggregate (i.e., currency + demand deposits
+ time deposits) is using in the by sbp.that the demand for M2 function is stable in Pakistan.
Utilizing the estimated money demand function the target rate of growth of M2 is set (Qayyum,
Monetary policy and its impact on real G.D.P in PAKISTAN Page 5

2002).In the 1990s the monetary policy is not more under the govt and that time there is
regulated policies for interest rate , credit control and reserve ratio in pakistan but later it is
going to manage free credit market and shift to govt for the changes (Shamshad, 2007). Broad
money supply growth has to be consistent with the targets of growth in real GDP and inflation
rate. However, if there are excessive demand pressures either because of high fiscal deficit or
because of the excessive foreign inflows money supply grows faster than the growth in
productive sectors and generates demand pressures which manifests itself in rise in inflation rate.
Despite all contests and debates, inflation is primarily a monetary phenomenon. To keep it
under control it is critical that macroeconomic imbalances are kept within the permissible limits.
Fiscal wastefulness in the past has resulted in Governments unlimited recourse to low and fixed
interest rate financing (State Bank of Pakistan, 2006). Pakistans inflation rate for 2009 financial
year is expected to be 20 percent which is 40 percent higher than the last years 12 percent. On
the other hand, GDP growth rate of Pakistan for 2009 and 2010 is projected to be 2.8 percent and
4.0 percent respectively (Asma, 2009). Thus there is a need to change the ways monetary policy
have been used to guide economy for future.The Central Bank designs Contractionary policy in
order to constrain the growth of money (i.e. increasing inflation) and credit in the economy. In
the present international scenario, due to hike in inflation internationally, like most of the
countries have adopted contractionary policy, Pakistan recently has also increased interest rate
by 0.5 percent and set 10 percent short-term interest rates. On the other hand Expansionary
policy is used as a tool by the central bank to broaden the monetary base and credit in the
economy by reduction in interest rates and increase in bond prices (Pakistan Defense Forum,
2008). The State Bank of Pakistan has a main objective of achieving price stability and promotes
growth. In order to contain inflation within the targeted level set by the government, SBP used
money supply as an instrument target. The statistics reveals that Money supply growth exceeded
its target level for four consecutive years 2002-2005. Due to easy monetary policy stance to
support the growth process, however the expansionary monetary policy results in rapid inflation
reaching double digit in 2005-2006. Inflation tax for the year 2005-2006 is estimated at Rs.
61928 million or 0.98 percent of GDP.
Before 2005-2006 monetary policy was biased towards supporting growth because inflation was
at low level but with the rising inflation from 2005-2006 monetary actions are towards the
containment of inflation (State Bank of Pakistan, 2006). Monetary policy affects inflation in two
ways. First, affecting indirectly, if monetary policy ableto achieve multiplier effect, it boosts up
economic activity. Initiating labor and capital markets toraise outputs beyond there capacities
and creating an upward pressure on wages, thus resulting inflation to rise (that is cost-push
inflation). Thus there would be a trade-off between higher inflation and lower unemployment in
the short-run which further accelerate inflation. As wages and prices start to rise they are hard to
bring down back, stressing the need for early policy measures to be taken.Secondly, monetary
policy can directly affect inflation via future expectations. Like if peopleexpect the rise in prices
in future, they persuade to increase in wages, which in turn affect the prices, resulting higher
inflation. The relationship between inflation and economic growth is non linear. For each one
Monetary policy and its impact on real G.D.P in PAKISTAN Page 6

percent point increase in inflation, in USA, annual growth rate has reduced by 0.223% (Smyth,
1992). At low rates of inflation this relationship is negative but insignificant; however higher
rates of inflation have a significantly negative effect on growth. Inflation not only decreases the
growth rate but also induces the uncertainty in economy. Keeping in view this hazardous nature
of inflation, worlds leading central banks have developed the idea that price stability is the
prime function of monetary policy (Blejer ,2000) ) and more precisely central banks are aimed to
keep the inflation rate low (Friend, 2000). Cause of inflation in Pakistan has been estimated by a
number of researchers (Khan and Qasim 1996) and it has been established that monetary
phenomenon are responsible for the high levels of inflation in long run (Khan, 2006). With
persistent high inflation in economy, economic growth of the country suffers and there is no
smooth running of the government policies under these high inflation rates. In Pakistan, rise in
inflation has been found asthe result of excess money supply growth (M2). The money supply
growth initially affects the real GDP and then hits the inflation in Pakistan. This may be due to
the loose monetary policy adopted by State Bank of Pakistan thus for reduction of inflation, tight
monetary policy in Pakistan must be Implemented (Qayyum, 2006).
SCOPE OF THE STUDY.
This research contains the changes in monetary policy that attempt to a way of economic growth,
price stability, as monetary policy objective is long term growth of economy with stabing the
inflation rate so for economic growth our gdp rate must be increase without inflation this can is
used as how much money is circulating within the economy , and in which how much money is
using for development projects ,and how much should be for liquidity in economy , as at what
interest rate is beneficial for stockholders and stakeholders .encouraging for developmental
projects. Reducing the poverty, unemployment, income distribution and best way of utilizing the
funds by financial institutions and their clients today are being more responsive to changes in
environment. By this research we analyze the goals of monetary policy. To influence the
economy govt uses monetary policy to attain its objectives in the form of stabling price, low
unemployment and economic growth. This study also shows the impact of monetary policy on
real GDP , interest rate, inflation rate, and unemployment. High rates of inflation cause
problems, not just for some individuals, but for aggregate economic performance.
Research Objectives
1. To indentify the influence of monetary policy on real gdp in Pakistan
2. To understand the relationship of money supply, interest rat and real gdp.
RESEARCH QUESTIONS
1. what monetary policy is? And which channel is used in Pakistan to influence the real
gdp?
2. Why inflation rate is big problem for real gdp growth? If so then how monetary
policy is controlling it in Pakistan?
Monetary policy and its impact on real G.D.P in PAKISTAN Page 7

3. Which channel is have more relationship with real gdp?
LITERATURE REVIEW
Before stating the our research model what other researchers have found the relationship of
GDP growth and Money supply, interest rate, and Inflation, we first attempt toimportance of
monetary policy in light of available literature.
As literature is about monetary policy and its impact on real gdp was first worked
byMiltionFriedman and Anna Schwartz (1963). According to them that changes in monetary
aggregates bring changes in real economic activity. Their research on united states data
presenting that if money growth rate is high that is impacting as increases in output above trend
and in case lower money rate that leads to decreases in output. They provide their result that is
based on 100 years of United States data. However these links and relationship does not find a
guarantee about the causal role of monetary policy and real economic activity because as
movements in monetary aggregates are not exogenous. As monetary policy is more focuses on
the nominal income .nominal income is equal to the sum of output and price level. In 1970 Tobin
firstly criticized that have opposite reflection that is output might be causing money. Tobins
qtheory, the wealth effect, the monetarist channel, and the credit channels including the bank lending channel and
the balance-sheet channel. In 1984 this opposite causation is also made by King and Plosser. As they
argue that due to banking sector is responding to economic disturbances the correlation between
theM1 or M2 and output occur. And there is no result of monetary policy actions. In 1996
Coleman predicts that money is more highly correlated with lagged output as opposite to future
output.They said that nominal income is equal to the sum of output and price level.The later
policy that is st. Louis approach in 1968 that states the nominal income is used as dependent
variable leading a change by money .Their results cannot show accurately the sum of output and
price level.
As Boweni in 2000 that all the govt. policies are affecting GDP rate in the economy .As
monetary policy is made by central govt of any country is affecting growth rate to a extent at
which its affect on quantity of laboure and capital.As we can show production of the economy
the combinations , processes of laboure and capital And their techonological relationship. In
Pakistan the monetary policy is impacting GDP and other macroeconomic variables in two
channels.
1.Through the effect that interest rate changes have on the exchange rate of a currency, and
2. Through the effect that interest rate changes have on demand. The reason is that monetary
policy is impacting the economic growth and price stability.
BY Hanif and Arby, in 2003 that monetary policy is independent and credible in making
stabilization for price level but some economists says that there is no issue if monetary policy is
is much more independent but still there is role of fiscal policy for stabilizing of economy.The
Monetary policy and its impact on real G.D.P in PAKISTAN Page 8

instrument of monetary policy ought to be the short term interest rate, that policy should be
focused on the control of inflation, and that inflation can be reduced by increasing short term
interest rates (Alvarez, 2001) . knife-edge.Kuttner and Mosser (2002) indicated that monetary policy affects
the economy through several transmission mechanisms such as the interest rate channel, the exchange rate
channel. There is great issue to the topics of economic growth and inflation causes a debate between monetarists
and structuralists. structuralists believe thatwithout any inflation no growth in economy and
inflation is essential for economic growth whereas the monetarists see inflation as detrimental to
economic progress. There are two important understandings of the debate that (a) the nature of
the relationship if one exists and (b) the direction ofcausality (Mallik, 2001). But in presents
research studies that inflation has a negative relationship on economic growth.from the era of
1950 and 1960 there is no relationship between inflation and growth by Although economists
now widely accept that inflation has a negative effect on economic growth, (Min, 2005). In the
Study of IMF papers in 1960there is no negative impact of inflation on economic growth. (Wai,
1959; Bhatia, 1960; Dorrance, 1963, 1966). When in many countries hyperinflation experiences
in economies especially in Latin America that inflation have a significant negative relationship
with economic growth.This view was also experienced with reaption of high level of
inflations.So the dominant view of today about negatively relationship between inflation rate and
gdp growth rate . (Min, 2005).Inflation rate can be determined through by monetary policy as
various studies providing empirical evidences that are stating relationship between inflation rate
and economic growth. According to the Lucas that inflation is the uncertainty in economy and
increases more uncertainty that is this activity realy productive or not.So inflation is negatively
impacting output growth. Even there is moderate level of inflation that is overall reducing
economic growth , financial sector development and increase the size of vulnerable poor
segment of population.and end result is damaging the real economic growth(Lucas, 1973).As
examined in another research that inflation on long term growth abstructing growth.the study
results when 2% increase in growth rate for industrial countries and 12% increase in
nonindustrial countries of total 63 industrial and nonindustrial countries.If it is below then
inflation has a remained positive relationship with growh(Kremer et al. 2008).Many economies
have the experiences of sustained inflation nearly 20% to 30% causing no adversely
consecounces but when inflation rate goes up 40% then it will resulted in asignificant declines in
real economic acitivities (Bruno and Easterly ,1998).Barro in his research on five year data of
100 countries about the period of 1960-90 resulted thatan increase in averageinflation by 10%per
yearwould decrease Real per capitaGDP with 0.2-0.3% per year.According to Baro that this
negative relationship is small decrease in growth, and in long term its effects onstandards of
living were actually substantial.(Barro, 1995) The relationship between inflation and economic
growth is strongly negative and statistically significant (Maghyereh ,2003).By Ahmed and
Mortza (2005) they stated that a significant statistically negative relationship between inflation
rate and economic growth by applying the data of CPI and Real GDP of Bangladesh during the
period of 1980 to 2005, and evaluate the moderate and stable level of inflation promotes the
development process and hence economic growth of the country.They also suggested that 6%
Monetary policy and its impact on real G.D.P in PAKISTAN Page 9

inflation rate is stable inflation rate if above this inflation that goes in adversely relationship of
economic growth and inflation .However In 1967 Johanson have no empirical evidences between
the two variables so in 1960 that was concept that inflation has no effect on growth and it was
not particularly important for researchers of economic growth topics.Also Fischer and
Modiglianani (1978) and the new growth theory mechanisms(Malla,1997) suggested that there is
a negative and nonlinearrelationship between the inflation rate and economic growth.They also
mentioned that inflation is being hurdle for reducing growth rate as this reducing the efficient
investment not its level.A 41 sample of average income countries including Fiji made by dewan
and hussien showing that negatively correlation of growth and inflation( Dewan and Hussein,
2001) .When examing the Fiji data that shows output gap is bearing as Fiji inflation outcome.
That output gap is difference between actual gdp and potential gdp.(Dewan and Hussein, 1999).
In Faria and Carneiro (2001) they analyzed that the relationship between inflation and economic
growth in the Brazile context is negative as there is persistent high inflation in short run but this
would not effect economic growth in the long run as data analysis on bivariate time series model
having annual record for the period between 1980 and 1995.In 2001 Malik examine that
relationship between inflation and economic growth is positive for Bangla desh Pakistan india
srilanka.the results of the study that relationship is positive for long run between GDP growth
rate and Inflation for all four countries.Their conclusion is on moderate level of inflation is
helpful to growth, if there is faster economic growth that is in long term to go into
slow.Monetary policy effects by many channels such as the interest rate channel , the exchange
rate channel Tobins q theory, the wealth effect, the monetarist channel, and the credit channels
including the bank lending channel and the balance-sheet channel but monetary policy is
controlling inflation through money supply and interest rate. (Kuttner and Mosser ,2002) The
money supply would effect Real GDP positively. As increase in the quantity of money causes
declines in the nominal interest rate and real output to rise.( Hsing, 2005).Taylor in 1995
explained the interest rate importance in above sence.From the result of Qayyume study in 2006
the correlation analysis shows a direct link between money growth and inflation. In first period
money supply growth effects Real GDP growth but in2nd period it is being excess money supply
and effects inflation in Pakistan.In conclusion it is proved in Pakistan inflation is monetary
matter.Have a good link with Mohsin and Axel study paper that an inverse relationship between
inflation rates and real per capita gdp of Pakistan that in the period 1978 to 1991 inflation is 8%
andper capita growth is 3% but inflationis 8% to 11% then per capita income is 1%.It is
recovered when inflation is fell down to 5% . As above discussion shows the non linear
relationship between inflation and economic growth. However inflation does effect economic
growth directly and inversely but still there is range of stable inflation that necessary for
economic growth. Monetary Policy variables such as Money Supply M2 and Interest rates along
withinflation also effect the economic growth in economy.
RESEACH METHOD
Monetary policy and its impact on real G.D.P in PAKISTAN Page 10

Our research methods deals with the data collection and its nature, sources, the model that we
use to find out the results and the cheking of hypothesis about the varriables.
DATA COLLECTION
The reseach specific objectives is the influence of monetary policy on real gdp growth in
pakistan so our data collection part have the periodic data for last 5 year data from 2008 to
2012is collected from the state bank of pakistan , ministtery of finance, and reseachers
collection.The description of variables that we are studying in our research are as under.
REAL GDP
GDP, or Gross Domestic Product is the value of all the goods and services produced in a
country.The Nominal Gross Domestic Product measures the value of all the goods and services
producedexpressed in current prices. On the other hand, Real Gross Domestic Product measures
the valueof all the goods and services produced expressed in the prices of some base year Gross
domestic product (GDP) is calculated by adding up public and private consumption, investments
and exports. With almost 80% of its GDP from consumption, Pakistan has particularly heavy
reliance on domestic public and private spending for its economic health. This is much higher
than the US consumption accounting for over 70% of its economy, and India's 60%. For the
purpose of research real gdp data collection in pakistan from the period of 2000 to 2011 we are
taking.The gdp growth in pakistan from the period 2000-05 is outstanding from 2% to 9% .but in
2006 it is going to delin 5.8% then in 2007 it raises to 6.8% and in the period of zardari govt. its
growth is not reasonable.In 2008 it is growth goes to decline and reached to 3.7 % and still it is
3.7%
MONEY SUPPLY
Money supply is the total quantity of money available in the economy at a fiscle time. In
pakistan M2 is using for price stability in economy. The indepent varriable that shows in our
research. The most commonly used monetary aggregates (or types of money) are conventionally
designated M1, M2 and M3. These are successively larger aggregate categories: M1 is currency
(coins and bills) plus demand deposits (such as checking accounts); M2 is M1 plus savings
accounts and time deposits under $100,000; and M3 is M2 plus larger time deposits and similar
institutional accounts. M1 includes only the most liquid financial instruments, and M3 relatively
illiquid instruments.
Interest Rate
The term interest rate usually means any bank lending rate. However, the rates dont always
move rapidly because they are driven by different forces. Rates on longer-term loans are driven
by 3 months, 6 months, and 12 months treasury bills in Pakistan. On treasury notes, like any
loan, the interest rates are fixed. However, Treasury notes are auctioned to the highest bidder.
Depending on the demand at auction, the note could cost more or less than face value. However,
at the end of the note's term, the Government pays back full face value to the bidder. In effect,
Monetary policy and its impact on real G.D.P in PAKISTAN Page 11

bidders are loaning the bid amount to the Government. In return, they get the interest rate and the
full face value.

Inflation Rate
Stable inflation is recognized as an integral component of sound macroeconomic policies.
Inflation refers to the persistent rise in general price level. Inflation affects the distribution of
both income and wealth. Nominal incomes of somein dividuals tend to increase with inflation,
while those of others remain constant thus causing a change in the distribution of income in favor
of the former group. Complex and multidimensional problem of inflation needs a systematic and
scientific understanding, examination, investigation and analysis. The excess money supply
growth and inflation in Pakistan are positively associated with each other. The money supply
growth at first-round affects real GDP growth and at the second round it affects inflation in
Pakistan. The important finding is that the excess money supply growth has been an important
contributor to the rise in inflation (Qayyum, 2006). This provides the basis to examine the impact
of monetary policy by controlling inflation on economic growth. Four different price indices are
published in Pakistan: the consumer price index (CPI), the wholesale price index (WPI), the
sensitive price index (SPI) and the GDP deflator. In Pakistan, the main focus is placed on the
CPI as a measure of inflation as it is more representative with a wider coverage of 375 items in
71 markets of 35 cities around the country. Also it most closely represents the cost of living. So
this study assumes annual CPI for the period 1980 to 2009 as an indicator of inflation in
economy.
HYPOTHESIS
On the basis of literature review, following hypothesis have been devised for the purpose of this
study:
H1: Interest rate has relationship with GDP.
H2: Growth in money supply has relationship with GDP.
RESULTS AND DISCUSSION
This chapter covers the estimation and analysis of data for the period 2008-2012to check out the
impact of monetary policy through inflation on growth rate of Pakistan

Model Summary
b

Model R R Square Adjusted R
Square
Std. Error of
the Estimate
Change Statistics Durbin-
Watson
R Square
Change
F Change df1 df2 Sig. F Change
1 1.000
a
1.000 1.000 .00000 1.000 . 2 2 . .311
a. Predictors: (Constant), IR, MS
Monetary policy and its impact on real G.D.P in PAKISTAN Page 12

b. Dependent Variable: RGDP
Dependent Variable: Growth in GDP Independent Variable: Interest Rate, Money Supply From
the results of the SPSS regression model, It has been observed that R was 1.000 that indicates
that the strength of relationship was strong, and the Coefficient of Determination (R^2) was
1.000which means that the 100 % percent of the model was explained & the remaining was
Explained as zero.. So we reject null hypothesis and the relationship among the
variables exists. Durbin-Watson test value was 0.311which was less than 2 which means that the
relationship among the observations does not exists
Interpretation:
Constant was-.015 which means even when the Interest Rate was Zero still GDP was -
11172412, the B1 was1.351E-020 which indicate that with one unit increase in money supply the
GDP increased by 1.351E-020 and vice versa, and the B2 was which indicate that with
one unit increase in money supply the GDP increased by 3187209 and vice versa.

Coefficients
a

Model Unstandardized Coefficients Standardized
Coefficients
t Sig. 95.0% Confidence Interval for B Correlations Collinearity Statistics
B Std. Error Beta Lower
Bound
Upper Bound Zero-order Partial Part Tolerance VIF
1
(Constant) -.015 .000

. . -.015 -.015

MS 1.351E-020 .000 .000 . . .000 .000 -.613 1.000 .000 .624 1.601
IR .500 .000 1.000 . . .500 .500 1.000 1.000 .790 .624 1.601
a. Dependent Variable: RGDP
Furthermore to improve the model, Autocorrelation has been applied on the data and at Final
Iteration 10 the Durbin Watson was improved from 0.311to 1.060.
Intraclass Correlation Coefficient
Intraclass
Correlation
b

95% Confidence Interval F Test with True Value 0
Lower
Bound
Upper
Bound
Value df1 df2 Sig
Single Measures .000
a
-.030 .225 1.000 4 8 .461
Average
Measures
.000
c
-.096 .465 1.000 4 8 .461
Two-way mixed effects model where people effects are random and measures effects are fixed.
a. The estimator is the same, whether the interaction effect is present or not.
b. Type A intraclass correlation coefficients using an absolute agreement definition.
Monetary policy and its impact on real G.D.P in PAKISTAN Page 13

c. This estimate is computed assuming the interaction effect is absent, because it is not estimable otherwise.
Correlations
RGDP MS IR
Pearson
Correlation
RGDP 1.000 -.613 1.000
MS -.613 1.000 -.613
IR 1.000 -.613 1.000
Sig. (1-tailed)
RGDP . .136 .000
MS .136 . .136
IR .000 .136 .
N
RGDP 5 5 5
MS 5 5 5
IR 5 5 5




CONCLUSION
Monetary policy is policy about economic and price stability in any economy.This policy tells
that what rate of interest is operated in the whole economy and how much total quantity of
money supply should be in there in circulation and reserved but seeing the current economic
position and conditions. The main target of monetary policy is to influence economic growth,
inflation, unemloyment, and exchange rate with other currencies.The factor interest rate is the
rate at which loan is borrowed or granted ,In other words it is the cost of credit.The factor total
money supply that is the availability of quantity of money in any economy. As our topic is more
related with monetary policy and its influence on real gdp growth in economy. For economic
growth and price stability any economy real gdp rate should be grown and inflation rate should
be decline.Both have negative relationship in the light of researches.As above discussion shows
the non linear relationship between inflation and economic growth. However inflation does
effect economic growth directly and inversely but still there is range of stable inflation that
necessary for economic growth. Monetary Policy variables such as Money Supply M2 and
Interest rates along withinflation also effect the economic growth in economy.
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Department, Working Paper 609.
Asma (2009). GDP growth rate to increase to four percent by 2010, Asian Development Bank
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Blejer (2000). Inflation Targeting in Practice: strategic & Operational Issues & Application to
Emerging Economies, International Monetary Fund.
Boweni (2000). Economic growth, inflation & monetary policy in South Africa, BIS Review
Bruno & Easterly (1998). Inflation Crisis & Long-Run Growth, JME, 41, 3-26.
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