Understanding Monetary Policy Communication: A VECM Approach Based on Pakistan

Abstract

This study investigates the multidimensional aspects of information in State Bank of Pakistan monetary policy; which consists of the policy rate and the monetary policy statements released by the Monetary Policy Committee. The effects of monetary policy communication and its tone on market expectations and the subsequent effects on macroeconomic variables i.e. the Consumer Price Index, output and credit intake is investigated. The Johansen's co-integration test showed existence of one co-integration equation; after which Vector Error Correction Model (VECM) was estimated to establish the long and short run relationships between variables. The language of monetary policy communication Granger causes CPI and credit intake in the short run. It was found that policy rate does not Granger cause any of the variables used. Nonetheless, neither the language of communication nor the policy rate have particularly strong effects on macroeconomic variables.