Impact Of Monetary Policy On Capital Flows: A Cointegration Analysis For Pakistan
Author: Muhammad Zaryab Akram

The financial imbalance in last recent years leads towards the disputed capital flows among the developed and developing countries. Therefore, policy makers pay much attention on managing the capital flows in order to stabilize their international financial situation. This objectifies us to test the long-run as well as short-run relationship between monetary policy tools and capital flows in the case of Pakistan. By Using the annual data from 1980 to 2019, we applied the Auto-regressive distributed lag (ARDL) technique to find out the long run and short run relationship between interest rate differentials, money supply and net capital flows. The results of our study posit that in the long run if the interest rate differentials increase by 1% then the net capital flows would be increased by 0.5175 million rupees in the long run and while in the short run the effect is of different magnitude that is 0.8457 million rupees. The positive sign with value of coefficient means the inflows of capital in the country. The results of this study also suggest that if the quality of the institutions becomes better by 1 percent it would attract the capital inflows by 0.1840 million rupees, similarly, absorptive capacity have also significant and positive impact on the capital mobility and results suggests that absorptive capacity would raise the capital flows by 0.7487 million rupees. In our study capital flows also shows negative relationship with different independent variables such any increase in the value of exchange rate pushes the capital flows out of the country. According to the results of our study by 1% increase in the real exchange rate, there is an outflow of 0.8323 million rupees. Similarly, a one percent increase in inflation also become the cause of capital outflows by 0.5188 million rupees. Findings suggest that there is need to focus on managing the capital flows by keeping other factors along with monetary policy measures. They should be managed in a way that they should not put any pressure on exchange rate as well as on inflation Supervisor:- Prof. Dr. Abdul Jalil

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Supervisor: Abdul Jalil

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