ABSTRACT

This study investigates the sectoral sacrifice ratios associated with disinflation policy in Pakistan using two Structural VAR models applied to yearly data ranging from 1973 to 2023. The analysis reveals that the economic cost of disinflationary monetary policy in Pakistan is significant, with estimated sacrifice ratios depending on the model for real GDP ranging from 0.54 to 0.68%. Sectoral analysis shows that all three major sectors (manufacturing, agriculture, and services sector) suffer negative impacts, with the manufacturing sector experiencing the most significant effect, evidenced by sacrifice ratios of 1.52 and 1.13% across models. The agriculture sector exhibits sacrifice ratios of 0.22 and 0.23%, while the service sector’s ratio ranges from 0.54 to 0.60%. This underscores the significant short-term output loss resulting from tight monetary policies in Pakistan, supporting the existence of a short-run trade-off between economic growth and inflation. A 20-year rolling estimation is also conducted and the results highlight the variability of sacrifice ratios over time, with recent trends indicating an increase in sacrifice ratio across RGDP, manufacturing and service sector, suggesting that disinflation has become more costly in recent years. The study advises caution in interpreting these results, underscoring the persistent high costs of disinflation in Pakistan’s economic history. To mitigate deflationary policy impacts, particularly on vulnerable sectors like manufacturing, policymakers should implement tailored measures such as targeted stimulus and differential interest rates. Furthermore, enhancing sector-specific data collection is crucial for refined policy decisions, ensuring long-term economic stability while balancing growth and inflation concerns.