Role of Monetary Policy in Asset Price Inflation: A Comparative Study of Developed and Developing Economies

Abstract

This study examined the relationship between monetary policy and asset price inflation in developed and developing economies, focusing on Pakistan. Using data from 2010-2024, the research employed multivariate GARCH and causality models to analyze the impact of various monetary policy tools on stock market indices and real estate prices. The findings revealed significant differences in economic policy's transmission mechanisms and effectiveness in influencing asset prices between developed and developing economies. In Pakistan, interest rate changes were found to have a more pronounced effect on stock market volatility than real estate prices. The study also highlighted the challenges developing economies face in implementing effective monetary policies to manage asset price inflation without compromising economic growth. This research is particularly important as it provides crucial insights for policymakers in developing economies like Pakistan, where the interplay between monetary policy and asset prices can have significant implications for financial stability and economic growth. By identifying the asymmetric effects of monetary policy and the role of policy uncertainty, this study contributes to developing more effective and targeted policy interventions in emerging markets.