Effectiveness of Monetary Policy in Controlling Inflation during Normal and Crisis Periods: An ARDL Analysis for Pakistan

Abstract

This paper examines how well monetary policy has worked to limit inflation in Pakistan between 2000 and 2024, considering the COVID-19 epidemic and the global financial crisis of 2008. The autoregressive distributed lag (ARDL) framework is used to evaluate the dynamics in the short and long term. The findings highlight the monetary policy rate's function as a key policy tool by showing that it significantly reduces inflation over the long term. Both the currency rate and the policy rate have a major impact on inflation in the short term, with the latter having long lasting consequences due to its delayed term. The error correction term corrects 77% of the disequilibrium per year, indicating a quick rate of adjustment.  Stability tests verify parameter constancy during times of crisis, while diagnostic tests verify the lack of heteroscedasticity, autocorrelation, and non-normality. The main goals of policy recommendations are to improve the efficiency of money supply mechanisms, control exchange rate volatility, and strengthen interest rate transmission.