Monetary Policy and Asset Price Channel: Recommendations for the Policy Makers of Developing Countries

Transcription

1 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) Moneary Polcy and Asse Prce Channel: Recommendaons for he Polcy Makers of Developng Counres Salman Al Shah 1 * Chen He 1 Khurram Shaf 1 Mukaml Shah 2 1. College of Publc Admnsraon, Huazhong Unversy of Scence and Technology, Wuhan,Chna 2. Insue of Managemen Scences, Peshawar, Paksan *Emal of he correspondng auhor: salman_alshah@yahoo.com Absrac Gven he lack of srong nsuonal framework and relavely unsable polcal suaon n developng counres, s very essenal o come up wh a dfferen and suable moneary polcy for hose counres. A longsandng macroeconomc ssue s how moneary polcy affecs he real economy. Asse prce channel s one of he mos mporan channels of moneary ransmsson mechansm. In hs sudy, we explored he asse prce channel of moneary ransmsson mechansm n a developng counry s seup. We carred ou our analyss n he framework of Vecor Auo Regresson whle akng accoun of all he lmaons of me seres daa. Our benchmark model accouns for smulaney and nerdependence among varables. We esed for boh shor and long erm relaonshps. Our daa se conans quarerly daa for weny years. We appled Johansen Co negraon es, Vecor Error Correcon Model and Granger causaly. We came across some puzzlng and alarmng resuls. Our analyss reveals ha sock prces have a negave long run relaonshp wh nvesmen and oupu whle s generally expeced ha a gh moneary polcy s lnked wh decrease n prces. Ths knd of puzzlng resuls should be aken no consderaon by he cenral bank. Furher, he analyss of he long erm relaonshp beween nvesmen and oher varables reveal ha here s negave long run relaonshp beween nvesmen and neres rae; herefore, he cenral bank should be cauous whle akng moneary polcy acons. Ineres rae s no causng any of he varables ncluded n he asse prce channel whch means ha neres rae s a weak polcy ool as for as s effec n he asse prce channel s concerned. Keywords: Asse prce channel, moneary ransmsson mechansm, money supply, sock prces, economc polces. 1. Inroducon The man am of he economc polces of governmen s o enhance he welfare of he publc. Moneary polcy gves suppor o hs broader am of economc polces by brngng sably n prces (Javd & Munr, 2010). Moneary polcy s couned n one of he mos effecve nsrumen ha he cenral bank has n s conrol. The cenral bank uses hs ool frequenly n order o conrol he real acvy n he economy (Maskay, 2007). Tesng he effecs of moneary polcy on he economy has been under sudy for a long me. Moneary polcy s no easy o undersand. A lo of researchers red o fnd an absolue answer for an opmum moneary polcy bu sll hey hold he vew ha s a hard queson. (M & Schwarz, 1963) can be ermed a poneer work n hs area. Polcy makers should have knowledge regardng he dfferen ransmsson mechansms of money whch nfluence he economy because moneary polces s a powerful nsrumen and can resul n unwaned oucomes (Mshkn, 1995). On he oher hand, lle consensus s here on how acually moneary polces brng changes no he economy and sudes ha revealed ha changes n oupu are caused by changes n moneary polcy were no able o reveal ha wha happens n he mddle and hus (Bernanke & Gerler, 1995) declared moneary ransmsson mechansm as Black Box. Ths s because moneary polcy works hrough dfferen channels a he same me. Somewha smlar are he houghs presened n (Gerlach & Smes, 1995) whch says a lo of work has been done on hs maer bu sll researchers dffer n her deas regardng how exacly moneary polcy mpacs he economy and how brngs changes across dfferen counres. Alhough a lo of auhors hold he vew ha moneary polcy sll can be undersood compleely ye here are scholars who have esablshed he fac ha moneary polcy sgnfcanly affec oupu n he case of developed economes. Sudes ha conclude hs fac are (Bernanke & Blnder, 1992), Romer and Romer (1989), Blanchard (1990), (Bernanke & Gerler, 1995) and Fredman (1995). Even hough developng counres are conneced o developed counres va rade, ye he challenges faced by developng counres n erms of moneary polcy are unque bascally due o he underdeveloped fnancal marke (Prasad, Hammond, & Kanbur, 2009). In he presence of a good workng fnancal sysem, he moneary polcy can sgnfcanly affec he prce levels n he economy (Gerlach & Smes, 1995). Sudes on moneary ransmsson mechansm n developng counres are (Bhaacharya, Panak, & Shah, 2011), (Floerkemeer & Dabla-Norrs, 2006), (Hussan, 2009), (Agha, Ahmed, Mubark, & Shah, 2005; Bag), (K. C. Cheng, 2006), (Omoke & Ugwuany, 2010), (Al-Masha & Bllmeer, 2008), (Nak, 2013), (CAMBAZOĞLU & GÜNEŞ) and (Vnayagahasan, 2013). 49

2 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) 2. Channels of Moneary Transmsson Mechansm: A number of moneary ransmsson mechansm channels can be raced back n economcs leraure. These channels nclude neres rae channel, exchange rae channel, asse prce channel, cred channel, expecaon channel and governmen expendure channel. These channels are no muually exclusve. The relave mporance of hese channels may vary from counry o counry dependng upon many facors. A number of emprcal sudes have been carred ou n hs area n developed economes bu no a lo of sudes can be raced back n leraure for developng and emergng counres especally n case of Paksan Asse Prce Channel: In a monearss vew; as soon as he money supply decreases n he economy, people realze ha hey have lesser money han hey wsh and hus hey ry o cu her spendng. One opon avalable o publc s o cu her spendng n sock marke whch resuls n a decreased demand for socks and hus he prces of eques are decreased. Whle a Keynesan suggess ha as soon as he neres rae rses n he economy, bonds become more aracve o publc han he socks and hus he prces of socks are lowered. Collecvely hese vews sugges ha a fall n money supply brngs a rse n neres rae whch brngs a fall n sock prces whch resuls n lowerng nvesmen spendng and hus resulng n lower oupu. (Mshkn, 2001), (Cassola & Morana, 2004), (Agha e al., 2005) and (Al-Masha & Bllmeer, 2008) also suppor he vew of mporance of asse prce n moneary ransmsson mechansm. 3. Theorecal Background The assumpon of hs sudy s ha flucuaons n moneary polcy brng flucuaons n neres rae. The flucuaons n neres rae affec Sock prces. Changes n sock prces are passed on o changes n Invesmen and hen on o Indusral producon. A loose moneary polcy wll lead o lower neres raes. Decrease n neres rae decrease he requred rae of reurn and he value of asses s affeced posvely. In parcular, an nvesor wll ry o change hs porfolo wh he fall n neres rae by addng more socks o and removng bonds from. Resulanly, s expeced ha sock prces wll be ncreased (Hashemzadeh & Taylor, 1988). Hgher sock prces wll resul n hgher Tobn s Q whch wll cause hgher nvesmen. An ncrease n Invesmen wll cause hgher Indusral Oupu (Mshkn, 1996). Symbolcally, MoneySupply IneresRae SockPrces Invesmen IndusralOupu 4. Research Mehodology: Fve varables ncludng money supply, neres rae, sock prces, nvesmen and oupu are used o examne he role of hs channel. Quarerly daa rangng from 1993:1 o 2013:4 s used for he purpose of analyss. The economerc mehodology ncludes saonary es, opmal lag selecon, Johansen co negraon es, Vecor Error Correcon Model and Granger causaly es. As we are dealng wh me seres daa herefore we wll es properes of he respecve me seres. Afer esng saonary, we need o choose he opmal lag lengh. Lag lenghs are deermned hrough dfferen creron such as Akake Informaon Creron (AIC) and Schwarz Informaon Creron (SIC). (Enders, 2008) argued ha Engle and Granger mehodology s easy o mplemen ye has some drawbacks. Praccally, co negraon can be evden n a regresson whle no co negraon can be found f we reverse he order. Ths characersc of he mehodology s hghly undesrable. Ths ssue becomes more complex when we are usng more han wo varables because we can pu any of hese varables on he lef hand sde. Furhermore, hs mehodology does no provde any procedure for mulple co negrang vecors. Engle Granger mehodology has anoher defec ha operaes n wo seps. In he frs sep, resduals are generaed and n he second sep regresson s esmaed usng hese resduals. Therefore, f one makes an error n he frs sep, ha error s passed on o he nex sep. Luckly Johansen (1988) mehodology accouns for he lmaons of Engle and Granger mehodology. In our analyss f we deec co negraon, hs mples ha a long erm relaonshp s presen beween he varables. In order o examne he shor erm dynamcs of he seres we use Vecor Error Correcon Model (VECM). In case we don ge co negraon beween he seres, hen we don need VECM and we drecly go for VAR Granger causaly n order o evaluae he causal relaonshp beween he varables. 4.1 The Model: The analyss n hs paper reles manly on vecor auo regresson. Use of VAR for esng he effec of moneary polcy n he economy was poneered by (Sms & A, 1980). (Agha e al., 2005) argued ha as here s lle consensus on how he moneary polcy works n Paksan, he VAR mehodology pus lesser resrcons abou he procedure of moneary polcy affecng he economy, whch can be consdered a dsnc advanage. The VAR mehodology also denfes smulaney beween macro economc varables and moneary polcy. 50

3 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) Smulaney s when moneary polcy s dependen on oher macroeconomc varables and when macro economc varables are dependen on moneary polcy. The use of VAR s also due o he exsence of leraure whch used he same mehodology for examnng ransmsson mechansm of money n varous counres. For example, (Agha e al., 2005), (Floerkemeer & Dabla-Norrs, 2006), (Al-Masha & Bllmeer, 2008), (Bag), (Hussan, 2009), (L. Cheng & Jn, 2013), (Lovrnovć & Benazć, 2004), (Morsnk & Bayoum, 2001), (Barakchan & Crowe, 2013), (Poddar, Khacharyan, & Sab, 2006), (Bjørnland & Leemo, 2009), (MahdBarakchan & ChrsopherCrowe, 2013), (Vnayagahasan, 2013) To examne he smulaney and nerdependence among hese varables, we sar from our basc benchmark reduced form vecor auo regresson model n marx form as follows: x Le represens he marx of all macro varables under sudy.e. x = [y p m2ri]', and x = [y- p- m2-r- I-]' be he marx of lag values of all macro varables ncluded n he analyss and e represens he marx of reduced form error, where Y = Gross Domesc Produc (Naonal Oupu) P = Sock prces (KSE-100 Index) M2 = MMR= I = Money Supply Ineres rae (Real neres rae) Gross Toal Invesmen Sarng from he benchmark VAR model as follows: y = p R I M2 + M2 p = M2 M2 MMR= M I y MMR+ M2 21 = p MMR y I + M2 31 I = p I M2 y + M p p y MMR+ M p + p p + MMR + y 13 + p MMR + y + MMR + y 34 + I 24 + MMR + y 15 + MMR + y 44 + I + I 55 + u y 25 + I 35 + I + u I + u p + um y y p = p M M I I MMR MMR y u p u (2) M 2 u I u MMR u Le B be he marx represenng he coeffcens of he varables whom responses we wan o check n each equaon n he VAR model and B0 represens he marx of nerceps, represens he coeffcen marx of lag x dependen and ndependen values of = [y- p- M2-I-R-]' and U represens he marx of srucural error. BX = B0 + X + u (3) Mulplyng B-1 on boh sdes X = B B + B X + B u (4) 0 Assume ha A0 = B-1B0,A = B-1 and e = B-1u, equaon (2) can be wren n he followng form: + u (1) MMR 51

4 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) p x = A + Ax + e 0 (5) = 1 In sandard form he reduced Vecor auo-regresson can be wren as: x = A0 + Ax A2x Apx p + e (6) Where, A0 = B-1B0, A = B-1ande= B-1u Wh he assumpons ha: E(ej) = 0 Var(ej) = σj2, 4.2 Daa: Quarerly daa for M2, Money marke rae, Sock prces, Gross oal nvesmen and GDP s used n hs sudy. The annual me seres wll be aken from he offcal webse of Sae Bank of Paksan whch n urn, wll be convered no quarerly me seres usng E vews sascal package. The daa perod ranges from 1993:1 o 2013:4. 5. Analyss The analyss n hs paper s carred ou n he followng seps. 5.1 Augmened Dckey FullerTes: Table 5.1 Un Roo Tes Varable Trend Lag Lengh T-Value/Crcal Value Order of Inegraon lgdp No I(1) (-2.58) lgdp No *** I(0) (-3.52) mmr No I(1) (-2.90) mmr No ** I(0) (-2.90) lg No I(1) (-2.58) g No *** I(0) (-3.52) lkse No I(1) (-2.58) kse No *** I(0) (-2.58) lm2 No I(1) (-2.58) lm2 No ** I(0) (-2.90) *** ** and * Imples ha he seres s saonary a 1%, 5% and 10% respecvely Resuls of Augmened Dckey Fuller es sugges ha all he varables are non saonary n level form. However, all of hese varables are saonary a frs dfference. I also shows ha hese me seres are negraed of order 1. These resuls sugges ha Johansen (1988) analyss should be performed o analyze he long erm relaonshp beween varables. 5.2 Opmal Lag Selecon In order o analyze he asse prce channel of moneary polcy n Paksan, we need o selec he opmal lag lengh. As we are usng quarerly daa n our analyss, whch resuls no low sample sze hus, we would prefer Schwarz Informaon Creron (SIC) as denfed by leraure. The followng able shows he resuls of SIC. 52

5 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) Table: 5.2 Var Lag Order Selecon Crera LogL LR FPE AIC SC HQ NA * * * 1.227* * I s evden from Table 5.2 ha he opmal leg lengh s Conegrang Vecors Idenfcaon of he number of co negrang vecors n our analyss s he nex sep afer deermnng opmal lag lengh. For hs purpose, race sascs and maxmum egen value sascs are appled. The es resuls are presened n Table 5.3. Table 5.3 Johansen Co negraon Tes Based on Maxmum Egenvalue and Trace Sascs Hypoheszed Trace Max-Egen No. of CE(s) Sasc Sasc None * A mos 1 * A mos A mos A mos Trace es ndcaes 2 co negrang eqn(s) a he 0.05 level * denoes rejecon of he hypohess a he 0.05 level I can be concluded from our emprcal resuls ha here are wo co negrang vecors n our analyss as evden from Table Normalzed Co negraon Equaons: The co negraon analyss shows ha here are wo co negrang vecors. In order o examne he long run co negrang relaonshp beween GDP and oher varables and beween GTI and oher varables, wo seps are followed. In he frs co negrang relaonshp, he frs co negrang vecor s normalzed on GDP. In he second co negrang relaonshp, he second co negrang vecor s normalzed on Invesmen. The frs normalzed co negrang sable relaonshp shows he long run relaonshp beween GDP, M2, KSE and neres rae as presened n Table 4.4. The second normalzed co negrang shows he long run relaonshp beween Invesmen, KSE, M2 and neres rae as presened n Table 5.4. Table 5.4 Johansen Long Run Co Inegraon Resuls Lag Varables ConEq1 ConEq2 SE eq 1 T-value eq1 SE eq2 T-value eq2 LGDP(-1) LGTI(-1) LKSE(-1) ** ** MMRR(-1) ** ** LM2(-1) ]** * C * The long-run co negrang relaonshp can be shown by reduced form equaons. The reduced form equaons are gven by; LGDP= LKSE MMR LM2 (7) (-1.95)* (3.70)** (5.02)** (-3.75)** The co negraon es shows sgnfcan long run relaonshp beween oupu, sock prces, neres rae and 53

6 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) money supply. The equaon suggess ha one percen ncrease n oupu causes a 3.8 percen decrease n sock prces. A un ncrease n oupu decreases he neres rae by 3.97 uns and one percen ncrease n oupu brngs 1.25 percen ncrease n money supply. All he parameers esmae elasces due o logarhmc ransformaon excep neres rae. The negave relaonshp beween sock prces and oupu can be jusfed on he reason ha ncrease n sock prces wll dscourage nvesmen n he sock marke whch n urn, wll cause declne n oupu. However, our resuls conradc (Agha e al., 2005) who argued ha hgher sock prces brng a rse n he marke value of company as compared o replacemen cos of capal and hus wll encourage nvesmen. The negave long run relaonshp beween neres rae and oupu s jusfable on he fac ha a rse n neres rae causes a rse n he user cos of capal whch n urn, brngs a declne n nvesmen. A declne n nvesmen brngs a fall n oupu level n he counry by he mulpler effec. The posve long run relaonshp beween money supply and oupu can be jusfed on he grounds ha a rse n money supply brngs a declne n neres rae whch n urn causes Tobn s q o ncrease and hus nvesmen. A rse n nvesmen brngs a rse n oupu. Our resuls are n lne wh (Mshkn, 1995) and (Agha e al., 2005) And LGTI = LKSE MMR LM2 (8) (-0.69) (3.24)** (4.92)** (-2.50)* Equaon 5.2 suggess a long run relaonshp beween nvesmen, sock prces, neres rae and money supply. The equaon furher shows ha one percen ncrease n nvesmen brngs 10 percen decrease n sock prces. A un ncrease n nvesmen causes 1.23 uns decrease n neres rae and one percen ncrease n nvesmen ncreases he money supply by 2.65 percen. The negave relaonshp beween nvesmen and sock prces can be jusfed on he reason ha ncrease n sock prces wll dscourage nvesmen n he sock marke. However, our resuls conradc (Agha e al., 2005) who argued ha hgher sock prces brng an ncrease n he marke value of frm as compared o replacemen cos of capal and hus wll encourage nvesmen. The negave long run relaonshp beween neres rae and nvesmen s jusfable on he fac ha a rse n neres rae brngs a rse n he user cos of capal whch n urn brngs a declne n nvesmen. The long run posve relaonshp beween money supply and nvesmen can be jusfed on he grounds ha a rse n money supply causes a declne n neres rae whch n urn causes Tobn s q o ncrease and hus nvesmen. Our resuls are n lne wh (Mshkn, 1995) and (Agha e al., 2005). 5.5 Vecor Error Correcon Model: Inroducng vecor error correcon model n he sable long run relaonshp can mprove he resuls of asse prce channel of ransmsson mechansm of money. The shocks n moneary polcy n Paksan may brng flucuaons n he long run relaonshp among varables. Granger represenaon heorem argues ha he exsence of co negraon leads o he exsence of error correcon. The error correcon mehodology helps us o undersand adjusmens n shor run n he long run relaonshp among varables afer he shocks n moneary polcy. In our analyss, wo error correcon models are presened n Table 5.5 and Table5.6 respecvely. Table 5.5 Vecor error correcon n long run relaonshp 1 Error correcon LGDP T value C [-1.95] LGDP [ ] LGDP [ ] LGTI [ ] LGTI [ ] LKSE [ ] LKSE [ ] MMRR [ ] MMRR [ ] LM [ ] LM [ ] ECT (-1) [ ] R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regresson Akake nfo creron Sum squared resd Schwarz creron Log lkelhood Durbn-Wason sa Table 5.5 shows he shor erm elasces of lag values n he error correcon model because of log ransformaon. The error correcon coeffcens should possess a mnus sgn and should have sgnfcan - value for error correcon. Granger s represenaon heorem argues ha a polcy shock creaes dsequlbrum bu a 54

7 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) ceran percenage of he dsequlbrum can be correced n he comng perod (Engle & Granger, 1987). I s evden from he able ha nvesmen n he frs lag s he mos mporan varable ha plays s role n he error correcon produced by he polcy shocks n he oupu vecor. Sock prces also plays role n he error correcon n oupu vecor whle all he oher varables reman slen n he error correcon. The coeffcen values n he error correcon model represen he degree of elasces; suggesng he percenage change n oupu as compared o he percenage change n he lag values of nvesmen, sock prces, money supply and neres rae. A 9.6 percen error correcon erm s evden from he analyss whch can be nerpreed as a 9.6 percen error correcon occurs n he oupu co negrang vecor. The analyss suggess ha oupu s more sensve o nvesmen n he shor run. These resuls are n lne wh (Mshkn, 1995). I s also evden from he analyss ha oupu s sensve o sock prces n he shor run. These fndngs are also n lne wh (Mshkn, 1995). Error correcon LGTI T values C -8.4 [ ] LGDP [ ] LGDP [ ] LGTI [ ] LGTI [ ] LKSE [ ] LKSE [ ] MMRR [ ] MMRR [ ] LM [ ] LM [ ] ECT (-1) [ ] R-squared Mean dependen var Adjused R-squared S.D. dependen var S.E. of regresson Akake nfo creron Sum squared resd Schwarz creron Log lkelhood Durbn-Wason sa The coeffcen values n he error correcon model represen he degree of elasces; suggesng he percenage change n oupu as compared o he percenage change n he lag values of nvesmen, sock prces, money supply and neres rae. A 7.5 percen error correcon erm s evden from he analyss whch can be nerpreed as a 7.5 percen error correcon occurs n he co negrang vecor. I s evden from he resuls ha nvesmen s more sensve o sock prces. Invesmen s also sensve o neres rae and money supply. These resuls are very much n lne wh (Mshkn, 1995). The mnus sgn wh co effcen suggess ha he error reduces over me. 5.6 Mulvarae VECM Granger Causaly Tes: The Granger causaly es helps us n order o deermne he weak exogeney among varables. Ths es suggess us he causal relaonshp of one varable wh he oher varable. The resuls of VECM Granger causaly es are repored n Table 5.7. The sgnfcan ch-square sasc shows ha he dependen varable s Granger caused by ndependen varable. Table 5.7 Mulvarae VECM Granger Causaly Independen Varables LGDP LGTI LKSE MMR LM2 Dependen varables Ch-sq LGDP ** * LGTI 12.14*** *** LKSE MMR 6.37** * LM *** 6.95** *,**, *** mples 10%, 5% and 1% sgnfcance respecvely Table 5.7 repors he causaly beween varables n he framework of Vecor Error Correcon. I s evden from he Table ha here s a b dreconal causaly beween money supply and nvesmen. Money supply causes neres rae o flucuae hereby, pung pressure on sock prces and hus nvesmen also flucuaes. The resuls 55

8 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) reveal ha oupu s Granger caused by sock prces and money supply. I s also evden from he resuls ha money supply causes nvesmen. Flucuaons n money supply are passed on o neres rae whch n urn causes sock prces o change hus leadng o a change n nvesmen. These resuls are very much n lne wh he leraure. The resuls of Mulvarae Granger causaly reveal ha nvesmen s Granger caused by oupu. Wh he ncrease n oupu, he ncome of people n he economy also ncreases whch n urn causes ncrease n savngs of he people. As soon as savngs of he people n he economy are ncreased, people wll end more owards nvesmen and hus nvesmen s flucuaed. The able reveals ha neres rae s Granger caused by oupu. Increase n oupu leads o an ncrease n expors whch causes ncrease n foregn exchange hus causng ncrease n money supply hereby, causng ncrease n neres rae. I s evden from Table 5.7 ha here s Granger causaly runnng from money supply o neres rae. The resuls also sugges ha nvesmen Granger causes oupu whch s very n lne wh (Mshkn, 1995). The resuls of Mulvarae Granger causaly es reveal ha sock prces are no caused by any of hese varables n case of Paksan. 6. Concluson and Polcy Recommendaons 6.1. Concluson: The analyss n hs paper s backed by (Mshkn, 1995) who argued ha asse prces play an mporan role n he moneary ransmsson mechansm. Moreover, (Agha e al., 2005) furher analyzed he role of asse prce channel n he moneary ransmsson mechansm and found ha here s an acve asse prce channel n Paksan. The curren sudy has been desgned o es he role of asse prce channel n moneary ransmsson mechansm n Paksan wh a large and updaed daa se. For hs purpose, Johansen co negraon es, VECM and Granger causaly ess were performed. The saonary of he me seres daa was esed n he frs sep. The resuls of co negraon es reveal ha here exss a negave long run relaonshp beween oupu and sock prces and beween oupu and neres rae whle posve relaonshp beween oupu money supply s evden from he resuls of Johansen co negraon es. Moreover, nvesmen and sock prces also came ou o be negavely relaed whle posve relaonshp beween money supply and nvesmen appeared from he resuls. Exsence of long erm negave relaonshp beween neres rae and nvesmen s evden from he resuls of co negraon es. Two co negrang vecors appeared from he resuls of co negraon es. The frs co negrang vecor s normalzed on oupu whle second co negrang vecor s normalzed on nvesmen. The resuls of Mulvarae Granger causaly es reveal ha oupu s Granger caused by sock prces and money supply. These fndngs show he sensvy of oupu o sock prces and money supply n long run n Paksan. These fndngs are also evden from he co negraon analyss. The mulvarae Granger causaly also reveals ha here s Granger causaly runnng from oupu o nvesmen and from money supply o nvesmen. The sensvy of nvesmen o money supply s also evden from he co negraon analyss. I can be concluded from he Granger causaly es resuls ha none of he varables s Granger causng he sock prces. I also means ha sock prces do no predc he performance of any of he gven varables. These fndngs are a b puzzlng bu he reason of hese puzzlng resuls may be he poor law and order suaon n he counry especally n he las few years of our sample perod. Invesors mgh be relucan o nves n he counry s sock exchange due o he hgh degree of uncerany n he soco-polcal, economc and law and order suaon n he counry. The Granger causaly es resuls reveal ha oupu and money supply Granger causes neres rae. The sensvy of neres rae o oupu s evden from he co negraon analyss as well whle he sensvy of neres rae o money supply s que obvous and has been emprcally proved n he leraure. Granger causaly runnng from Invesmen o money supply and from sock prces o money supply s evden from he resuls. The sensvy of money supply o oupu s evden from he co negraon es resuls as well. Increase n oupu brngs n expors whch resuls n ncrease n foregn exchange and hus money supply. I s evden from he resuls ha neres rae s no Granger causng any of he gven varables Polcy Recommendaons: The resuls from he analyss of long erm relaonshp beween oupu and oher varables sugges ha he cenral bank should sablze neres rae as has negave long run relaonshp wh oupu. Furher, he analyss of he long erm relaonshp beween nvesmen and oher varables reveal ha here s negave long run relaonshp beween nvesmen and neres rae herefore, he cenral bank should be cauous whle akng moneary polcy acons. Our co negraon analyss reveals ha sock prces have a negave long run relaonshp wh nvesmen and oupu, whle s a generally expeced ha a ghenng moneary polcy s lnked wh decrease n prces. Ths knd of puzzlng resul was dscussed by (C. A. Sms, 1992) who argued ha moneary ghenng has posve mpac on prces. Our analyss suggess ha oupu s responsble for causng nvesmen and neres rae. Governmen should pay aenon o he GDP as has he power o flucuae he neres rae. GDP also Granger causes nvesmen whch n urn, causes money supply. Ineres rae s no causng any of he varables ncluded n he asse prce channel whch means ha neres rae s a weak polcy ool as for as s effec n he asse prce channel s concerned. The cenral bank should reduce he Exchange Rae 56

9 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) flucuaons. Declne n exchange rae causes he wealh of foregn nvesors o decrease n he sock marke hus hey wll be relucan o nves n he counry. There are oher deermnans ha nfluence sock prce oher han he varables ncluded n he asse prce channel. These deermnans are war on error and polcal nsably. The moneary polcy s acve n long run whle s no acve n shor run. The asse prce channel s no very acve n Paksan ha s why we should focus on oher channels of moneary ransmsson mechansm. Oher channels of moneary polcy can be explored n he fuure and her effec n he moneary ransmsson mechansm can be examned. Oher developng counres can also be ncluded n he analyss. References Agha, A. I., Ahmed, N., Mubark, Y. A., & Shah, H. (2005). Transmsson mechansm of moneary polcy n Paksan. SBP-Research Bullen, 1(1), Al-Masha, R., & Bllmeer, A. (2008). The moneary ransmsson mechansm n Egyp. Revew of Mddle Eas Economcs and Fnance, 4(3), Bag, M. A. THE EFFECTIVENESS OF MARKET-BASED MONETARY TRANSMISSION MECHANISM IN PAKISTAN (January 1993-Aprl 2009). Book Revew, 146. Barakchan, S. M., & Crowe, C. (2013). Moneary polcy maers: Evdence from new shocks daa. Journal of moneary economcs, 60(8), Bernanke, B. S., & Blnder, A. S. (1992). The federal funds rae and he channels of moneary ransmsson. Amercan economc revew, 82(4), Bernanke, B. S., & Gerler, M. (1995). Insde he black box: he cred channel of moneary polcy ransmsson: Naonal bureau of economc research. Bhaacharya, R., Panak, I., & Shah, A. (2011). Moneary polcy ransmsson n an emergng marke seng: Inernaonal Moneary Fund. Bjørnland, H. C., & Leemo, K. (2009). Idenfyng he nerdependence beween US moneary polcy and he sock marke. Journal of moneary economcs, 56(2), CAMBAZOĞLU, B., & GÜNEŞ, S. Moneary Transmsson Mechansm n Turkey and Argenna. Cassola, N., & Morana, C. (2004). Moneary polcy and he sock marke n he euro area. Journal of Polcy Modelng, 26(3), Cheng, K. C. (2006). A VAR analyss of Kenya's moneary polcy ransmsson mechansm: how does he cenral bank's REPO rae affec he economy? : Inernaonal Moneary Fund. Cheng, L., & Jn, Y. (2013). Asse prces, moneary polcy, and aggregae flucuaons: An emprcal nvesgaon. Economcs Leers, 119(1), Enders, W. (2008). Appled economerc me seres: John Wley & Sons. Engle, R. F., & Granger, C. W. (1987). Co-negraon and error correcon: represenaon, esmaon, and esng. Economerca: journal of he Economerc Socey, Floerkemeer, H., & Dabla-Norrs, E. (2006). Transmsson mechansms of moneary polcy n Armena: Evdence from VAR Analyss. IMF Workng Papers, 6248(200), Gerlach, S., & Smes, F. (1995). The moneary ransmsson mechansm: evdence from he G-7 counres: Cenre for Economc Polcy Research. Hashemzadeh, N., & Taylor, P. (1988). Sock prces, money supply, and neres raes: he queson of causaly. Appled economcs, 20(12), Hussan, K. (2009). Moneary polcy channels of Paksan and her mpac on real GDP and nflaon. Cen In Dev Grad Sud Work Pap(40). Javd, Muhammad, and Kashf Munr. "The prce puzzle and moneary polcy ransmsson mechansm n Paksan: Srucural vecor auoregressve approach." The Paksan Developmen Revew (2010): Lovrnovć, I., & Benazć, M. (2004). A VAR analyss of moneary ransmsson mechansm n he European Unon. Zagreb Inernaonal Revew of Economcs and Busness, 7(2), M, F., & Schwarz, A. J. (1963). A moneary hsory of he Uned Saes. Prnceon Unversy Press, Prnceon, NJ. MahdBarakchan, S., & ChrsopherCrowe. (2013). Monear ypolcy maers: Evdence from new shocks daa. Journal of moneary economcs, 60, Maskay '07, Bnv, "Analyzng he Relaonshp beween change n Money Supply and Sock Marke Prces" (2007). Honors Projecs. Paper 35 Mshkn, F. S. (1995). " Symposum on he Moneary Transmsson Mechansm. The Journal of Economc Perspecves, Mshkn, F. S. (1996). The channels of moneary ransmsson: lessons for moneary polcy: Naonal Bureau of Economc Research. Mshkn, F. S. (2001). The ransmsson mechansm and he role of asse prces n moneary polcy: Naonal bureau of economc research. 57

10 Developng Counry Sudes ISSN X (Paper) ISSN (Onlne) Morsnk, J., & Bayoum, T. (2001). A peek nsde he black box: he moneary ransmsson mechansm n Japan. IMF Saff Papers, 48, Nak, P. K. (2013). Does Sock Marke Respond o Economc Fundamenals? Tme-seres Analyss from Indan Daa. Journal of Appled Economcs & Busness Research, 3(1). Omoke, P., & Ugwuany, C. (2010). Money prce and oupu: Causaly es for Ngera. Amercan Journal of Scenfc Research, 8, Poddar, T., Khacharyan, H., & Sab, R. (2006). The moneary ransmsson mechansm n Jordan: Inernaonal Moneary Fund. Prasad, E. S., Hammond, G., & Kanbur, R. (2009). Moneary Polcy Challenges for Emergng Marke Economes. Brookngs Global Economy and Developmen Workng Paper(36). Sms, & A, C. (1980). Macroeconomcs and realy. Economerca, 49, Sms, C. A. (1992). Inerpreng he macroeconomc me seres facs: The effecs of moneary polcy. European Economc Revew, 36(5), Vnayagahasan, T. (2013). Moneary Polcy and he Real Economy: A Srucural VAR Approach for Sr Lanka: Naonal Graduae Insue for Polcy Sudes. 58

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