Acta Universitatis Danubius. Œconomica, Vol 12, No 4 (2016)

Abstract

The study takes a first step in investigating the monetary transmission mechanism in Pakistan at a sectoral level in relation with business cycles. The key objective of the study is to empirically investigate the impact of monetary shocks on output of major sectors. Using VAR approach on quarterly data spanning from 1990:1 to 2012:4, we examine whether monetary policy shocks have different sectoral effects. We also incorporated business cycles to analyze weather sectoral effects of monetary policy undergone any changes during different phases of business cycles. Results obtained from VAR framework confirm the presence of sector-specific variation in the real effects of monetary policy. Our results also suggest that variation in output is more interest sensitive in recovery as compared to recessionary time periods. The results, therefore, seem to confirm potential disparities in the effect of monetary policy on real sectoral activities. It is a very unique contribution in empirical literature while at the same time it is a valuable input for accessing monetary policy implications for real sector growth in Pakistan.