THE LAGS IN EFFECT OF MONETARY POLICY: A CASE STUDY OF PAKISTAN

Monetary policy plays an important role in the development process of an economy. In literature several transmission channels have been identified through which monetary policy influences the economy. The understanding of the transmission mechanism of monetary policy is a key to conduct successful policy for the country. For this purpose, it is considered to be essential to have sound knowledge of the dynamic relationship between monetary policy instruments and its objectives. The results of the study reject Friedman’s point of view and reveal that monetary policy affects prices significantly after nine months lag. The study suggests that there is a need to adopt tight monetary policy for protecting the economy from inflationary shocks.