There are different theories explaining the relationship between policy rate and inflation. Some of these theories conclude that policy rate causes to reduce inflation, whereas some theories states that rising policy rate will lead to rise in inflation. The most popular theory is called “Demand channel of Monetary Transmission Mechanism”, which states that increase in policy rate would reduce the money supply, aggregate demand and hence the inflation. On the other hand, the cost channel states that rising policy rate will increase the cost of production; therefore, inflation will rise and mark-up channel states that rising policy rate will increase mark-up payment which leads to increase in overall domestic debt. It is also possible that the downward push due to decrease in aggregate demand is cancelled by upward push due to increase in cost of production, and the net effect becomes insignificant which was seen in the study of Ghaffari (2013). The appropriate policy for controlling inflation would depend on the relative importance of demand and cost side of the monetary transmission mechanism. This study takes the help of historical data from 1975 to 2018 via source of World Bank data set to explore the nature of relationship between policy rate and macroeconomics performance. General to specific methodology was used by utilizing ARDL approach for investigating the desired relationship. We found the effect of policy rate on inflation and domestic debt is significantly positive but insignificant with budget deficit. Supervisor:- Dr. Saud Ahmad Khan