Monetary Policy, Oil Rents, Exchange Rate and Consumer Prices Nexus: A Case Study of Pakistan

Abstract

This research examines the effects of monetary policy in the form of nominal money supply, economic growth, exchange rate, and oil rents on domestic prices for Pakistan's economy. By taking an annual data series, this research reports evidence of mixed integrated order of the data series. The estimates of the ARDL bounds test suggest that consumer prices have a long-run cointegrating relation with its factors. The findings also highlight that the money supply supports the causality thesis, indicating that when the money supply stretches, it accelerates domestic prices. Moreover, it is also exposed that domestic output, exchange rates, and oil rents have significant and appreciating effects on consumer prices in both time spans. These results are robust to the diagnostics used in this research ensuring the reliability of the results. Based on these results, money supply and exchange rate should be controlled by the policymakers in such a way that it should not allow domestic prices to rise. Moreover, an attempt should be made via which increase in domestic out, and oil rents should remain greater than the increase in prices.