آیا اثرات سیاست پولی بر خروجی نامتقارن در پاکستان است؟

This research mainly investigates whether the response of output to monetary policy actions is symmetric or not. We test all the three main forms of asymmetries in the impact of monetary policy discussed in the literature so far. Also, we make some hybrid cases to go further in the detail of the tested asymmetries. While mainly following the methodology given by Cover (1992), we make some necessary variations to the procedure. We find evidence in the favor of asymmetry in the effects of monetary policy actions on output. Our results indicate that monetary policy actions seem ineffective in periods of high growth while having strong effects on output during low growth periods. Further, output responds strongly to tight monetary policy actions when the economy is in low growth phase. We also find some support for the argument that negative money supply changes affect output whereas positive changes do not. The findings also suggest that output responds only to small monetary policy shocks and big shocks do not significantly explain the variations in the transitory component of output. The results of hybrid case give further insight that output strongly responds to small negative monetary policy shocks. Wald test rejects the hypothesis of symmetry in the favor of asymmetry in the response of output to monetary policy actions in all the cases.

“Monetary policy was a string. You could pull on it to stop inflation but you could not push on it to halt recession. You could lead a horse to water but you could not make him drink.” ( Friedman, 1968, pg. 1) A considerable amount of literature exists to determine the effectiveness of monetary policy in the real economy. Today it is well established that money can affect output over the short horizons. However the next question is whether or not this effect is symmetric with respect to direction of policy change, size of policy shock and/or state of the economy. This issue is as vital as the first one because the same kind of policy assuming symmetric effects of any kind of policy action may not provide the required results as expected by the policymakers. Since the Great Depression, the issue of possible asymmetry in the response of output to changes in monetary policy has been under discussions. However until the start of 1990s researchers did not try to empirically test the issue. Generally, these asymmetric effects are explained on the basis of asymmetric information and nominal rigidities. A number of theoretical models explain the asymmetry in the relationship of monetary policy and aggregate output. These models include standard Keynesian model with convex aggregate supply curve, credit constraint models, the liquidity trap theory, and menu cost models. International experiences also indicate such type of asymmetries present in the impact of monetary policy. In the US tight monetary policy slowed down the economy during the years 1988 and 1989 whereas in 1990 when the government eased the policy the economy did not respond accordingly (see Morgan, 1993). Similarly Japan's expansionary policy, during its great recession starting in the late 1990s, failed to achieve recovery. More recently again in the USA, Federal Reserve's overnight federal funds rate has been at 0.25% since December 2008 yet it failed to induce banks to lend and rebound the consumer spending. These practical evidences motivate economic researchers to investigate the issue empirically. Empirically, the first distinction made in the effects of changes in nominal demand was about the different effects of anticipated and unanticipated changes in monetary policy on output, and was done by Barro (1977), Mishkin (1982), and Frydman and Rappoport (1987). However the notion of asymmetry in the effects of monetary policy actions was actually realized after the seminal work by Cover in 1992. He gave empirical support to the traditional Keynesian view that output reduces in response to monetary contractions while monetary policy expansions fail to raise output. Another well-known type of asymmetry, tested by Ravn and Sola (1996), is the asymmetric impact of large versus small monetary shocks. Moreover, the impact of monetary policy on output may not be symmetric during different phases of business cycle also. Weise (1999), Garcia and Schaller (2002), Lo and Piger (2005) and others supported the existence of asymmetry related to the state of economy. More recently, a considerable amount of empirical research on this issue is emerging as case studies for different developing countries as well, e.g., Aye and Gupta (2012) and others. Concluding the results of this existing research, we observe that in most of the cases data gives strong evidence that policy actions taken during recessions have large and significant effects on output than those taken during expansions. The evidence for asymmetry related to the sign of policy action is mixed in other countries. Cover (1992) and some other researchers like DeLong and Summers (1988) and Morgan (1993), supported that positive and negative monetary shocks have asymmetric effects. On the other hand, Ravn and Sola (1996) find that positive and negative monetary shocks have symmetric effects. Also literature shows that output responds strongly to small negative shocks. These asymmetries in the response of output to changes in monetary policy can have strong implications for an economy concerning issues such as the conduct of policy and the costs of changes in nominal demand. A considerable literature on the possible asymmetry of monetary policy exists but it is mostly done for the United States and some other countries. However, in the case of Pakistan, no such work exists till date and it remains a quite unexplored area in Pakistan. Motivated by this, the present study is a kind of an attempt to initiate research in this area and to test the asymmetric response of output to changes in monetary policy in Pakistan. The prime objective of this study is to investigate whether the response of output to monetary policy actions is symmetric or not. More specifically, the present study addresses the following three questions related to the asymmetry in the effects of monetary policy: Are the effects of monetary policy shocks on output asymmetric with respect to different stages of business cycle? Are the effects of positive and negative monetary policy shocks on output asymmetric? Are the effects of big and small monetary policy shocks on output asymmetric? In addition to testing these three main types of asymmetry we also make their hybrid cases in order to have a deeper insight into this issue. For this purpose we also investigate the following: Are the effects of positive and negative monetary policy shocks on output asymmetric with respect to different stages of business cycle? Are the effects of big positive monetary policy shocks on output different from that of small positive shocks and are the effects of big negative monetary policy shocks on output different from that of small negative shocks? By addressing these questions, the study tries to make the following contributions to the empirical literature on the asymmetric effects of monetary policy. First, it is an attempt to initiate research in the area of asymmetric response of output to monetary policy actions in Pakistan. Secondly, it tests all the three main forms of asymmetries in the effects of monetary policy together, that have been discussed in the literature so far. Third, in order to acquire more insight into this issue we make some hybrid cases of asymmetry. We mainly follow the methodology given by Cover with some important variations to the procedure. Our results indicate that monetary policy actions seem ineffective in periods of high growth while having strong effects on output during low growth periods. Further, output responds strongly to tight monetary policy actions in recessionary periods. We also find some support that negative money supply changes affect output whereas positive changes do not. The findings also suggest that output strongly responds to small negative monetary policy shocks. The rest of the study is organized as follows. The next section discusses the history and the theoretical foundations of asymmetric effects of monetary policy. Section 3 deals with the choice of variables and data issues and we explain the model and the estimation procedure in the fourth section. Section 5 reports the results with their detailed analysis. Finally, Section 6 attempts to bring together the main findings for concluding remarks.

This research is mainly focused on testing whether the effects on output of different types of monetary policy actions are symmetric or not. We test all the three main forms of asymmetries in the impact on output of monetary policy actions that have been discussed in the literature so far. While mainly following the methodology given by Cover (1992), we make some important variations to the procedure. Firstly, we use a specification consistent with standard VAR assumption, in which policy has not any contemporaneous effect on output. Also we assume that, in the long run, monetary policy has no real effect and thus policy measures affect only the transitory output in our model. Secondly, we extend cover's procedure to test for all the three main forms of asymmetries in the case of Pakistan. Moreover, in order to acquire further insight into this issue we divide the monetary shocks accordingly and make some hybrid cases of asymmetry also. Our results indicate that monetary policy actions seem to have no effect on output in periods of high growth while having strong effects on output during low growth periods. Going into the further detail of this type of asymmetry, we find a strong response of output to only a tight monetary policy action when the economy is in low growth phase. Results also show that expansionary monetary policy may not work in recessions. This is possible as easy policy relaxes credit constraints by lowering market rates but if the slowing economy has reduced the demand for credits then easy policy may not be successful in symmetrically increasing output. In the case of the asymmetry related to the direction of policy action, findings suggest that negative money supply changes affect output whereas positive changes do not. In the case of asymmetry related to the size of policy action, findings suggest that output responds only to small monetary policy shocks and big shocks do not significantly explain the variations in the transitory output. Investigating further we find that output strongly responds to small negative monetary policy shocks and the magnitude of the coefficient is considerably large in this case whereas, all the other types of shocks in this case are statistically insignificant. We also apply the Wald test on the coefficients and the test rejects the hypothesis of symmetry in the favor of asymmetry in the response of output to monetary policy in all the cases. In the end we check for the robustness of our results by using an alternate specification of output equation. This does not alter the results and the findings seem robust in all the five cases of asymmetry under consideration. The findings of the present study suggest that there exists asymmetry in the response of output to monetary policy in Pakistan. Same kind of policy assuming symmetric effects of any nature of policy action may not provide the required results as expected by the policymakers. The evidence implies that positive money supply shocks may be an ineffective anti-recessionary policy. On the other hand, output strongly responds to contractionary policies when they are small in size. These contractions of monetary policy lower output considerably and hence such kind of policy should be used with caution.