Monetary Policy and Inflation: A Regime-wise Assessment of Pakistan’s Economy

Year 2026, Volume: 13 Issue: 1 , 251 - 276 , 19.02.2026

Waqqas Qayyum , Faiza Noor , Hamid Hasan

https://doi.org/10.26650/JEPR1782004

https://izlik.org/JA47EU29XU

Abstract

Inflation poses a major global issue, particularly in developing nations like Pakistan. Money growth serves as a crucial indicator of inflation and economic expansion. The State Bank of Pakistan manages monetary policy to stimulate the economy and mitigate economic fluctuations, influencing people’s financial choices. This study aims to assess how monetary policy impacts inflation across different regimes in Pakistan. Three distinct regimes are identified: pre-reforms, post-reforms to post-crisis, and post-structural changes. This helps in evaluating the stability of the money supply-inflation relationship over time. Money is categorised as inside money (time and demand deposits) and outside money (currency in circulation) to assess monetary policy’s relative impact on inflation.

Using co-integration tests and FMOLS on quarterly data from 1982Q1 to 2019Q4, the study explores the relationships among variables, including money supply, exchange rate, adjusted real GDP, and budget deficit. Results show a significant long-term relationship, except for economic growth. FMOLS findings indicate a consistent money supply-inflation relationship across regimes. Private and central banks both influence inflation, with private banks slightly more impactful. The State Bank of Pakistan should prioritise managing private sector autonomy for effective inflation control, as central banks aim to control inflation more than commercial banks.

Keywords

Monetary policy , Regimes • Pakistan , Inflation , Inside money , Outside money , Cointegration , FMOLS

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