This study examines the effects of monetary policy on macroeconomic variables in Pakistan at the aggregate and disaggregate levels. For this purpose VAR and FAVAR methodologies were employed using monthly data from, January 1992 to December 2010 containing 115 monthly macroeconomic variables. At the aggregate level the results of VAR and FAVAR models were compared which showed that the FAVAR model explained the effects of monetary policy which were consistent with theory and better than the VAR model. The VAR model suffers from price and liquidity puzzles that are not found in the FAVAR model. The FAVAR model supports the effectiveness of the interest rate channel. The transmission of monetary policy shocks is faster in case of prices as compared to output. Monetary policy affects output in the short run but in the long run all effects of monetary impulses are transmitted to nominal variables i.e. money and prices. Consumer and wholesale prices at the aggregate level show that prices are perfectly flexible; disaggregate prices on the other hand reveal that there is strong heterogeneity in both the response of the consumer and the wholesale prices. The transmission of monetary policy shock was found to be faster in wholesale prices than in consumer prices while the capital market was unresponsive. The most severely affected victim of monetary squeeze was credit to private sector. Commodity output showed strong heterogeneity. Rupee to US dollar exchange rate fell initially in response to an unanticipated positive shock in monetary policy but then showed continuous appreciation. Supervisor: Dr. Abdul Qayyum