The Research Proposal

“Effect of monetary policy measures on economic growth”

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF ECONOMICS,

VIRTUAL UNIVERSITY OF PAKISTAN IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE DEGREE OF BACHELOR’S IN ECONOMICS

SUBMITTED BY:-
NAME: USAMA WAQAR
STUDENT ID: BC210417979

Submission date: 05-06-2023

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 The Research Proposal

Table of Contents
Section I...........................................................................................................................................3
Chapter 1: Introduction....................................................................................................................3
1.1 Introduction of the study:-....................................................................................................3
1.2 Background of the study:-....................................................................................................3
1.3 Objectives of the study:-.......................................................................................................4
1.4 Significance of the study:-....................................................................................................5
Chapter 2: Review of literature........................................................................................................6
2.1 Review of literature:-............................................................................................................6
Chapter 3: Methodology..................................................................................................................8
3.1 Information:-.........................................................................................................................8
3.2 Variables:-.............................................................................................................................8
3.3 Model Specifications:-..........................................................................................................8
3.4 Procedure:-............................................................................................................................9
3.5 Data Processing Tools:-........................................................................................................9
Section II........................................................................................................................................10
A. Introduction of the student:-...............................................................................................10
B. Bibliography:-.....................................................................................................................10

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Section I

Chapter 1: Introduction

1.1 Introduction of the study:-

Monetary policy is an important tool that have been utilized by government to effectively
managed economic activities i.e. money supply, interest rate, loan availability. Therefore, the
role of policy, in supporting growth is quite evident and straightforward.
In any country the central bank holds the responsibility for making decisions regarding policy.
The banks decisions to implement these policies have an impact, on the development and growth
of the economy. The measures they take, like adjusting interest rates and managing money
supply can greatly affect investment patterns, consumer spending and overall economic activity.
Recent studies have shed light on the role played by policy decisions in shaping economic
growth outcomes. For instance Brown and Johnsons research conducted in 2023 demonstrated
that expansionary measures in policy, characterized by interest rates and increased accessibility
to credit, have a positive effect on investment levels and contribute to economic growth.
Similarly Smith et al. in their study published in 2022 emphasized how ensuring stability in
inflation through policy is essential for long term economic growth and progress.
The objective of this project is to investigate how different indicators of growth such, as inflation
rate, investment levels and balance of payments are influenced by monetary policy measures.
We conducted this study to study and understand how and by what means monetary policy
affects economic growth?
The reason for conducting this study is to provide policy makers with valuable information so
that they can make revolutionary economic development policies.
The reason for conducting this study is to provide policy makers with valuable information to
make revolutionary economic development policies.
1.2 Background of the study:-
Monetary policy plays a role, in the development of any country including Pakistan. The Central
Bank of Pakistan employs measures, such as open market operations and adjustments to interest
rates to manage and coordinate the money supply in alignment with its objectives. These

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objectives focus on fostering growth and addressing challenges associated with economic
downturns.
In years the global economy has faced the challenge of recession. This has underscored the
significance of monetary policy measures as tools for policymakers to navigate downturns and
foster stable economic growth. In Pakistan’s case the banks decisions regarding policy have
played a crucial role in mitigating the impact of recessionary periods and guiding the country
towards sustainable growth.
Several empirical studies have examined how monetary policy measures relate to growth in
Pakistan. For instance a study conducted by Ahmed and Malik (2021) demonstrated that
expansionary monetary policy, characterized by lower interest rates and increased money supply,
positively influenced growth, in Pakistan. Another study by Khan et al. (2020) emphasized the
effectiveness of free market operations in controlling inflation and promoting economic stability.
Despite these insights there is still a research gap when it comes to understanding the
mechanisms through which monetary policy impacts economic growth in Pakistan. Although
previous research has yielded insights it is crucial to conduct studies to delve into the intricacies
of this connection. These investigations should aim to uncover any limitations and put forward
policy suggestions that suit the circumstances of Pakistan.
Hence this study aims to fill the gap, in research by investigating how monetary policy measures
impact growth in Pakistan. By analyzing the ways in which monetary policy influences
economic indicators like inflation and investment we seek to gain a comprehensive
understanding of the effects and outcomes of monetary policy decisions within the Pakistani
context. The findings from this research will contribute to the body of knowledge on policy and
economic growth in Pakistan while also providing policymakers with valuable insights to
formulate effective and targeted policies, for sustainable economic development.
1.3 Objectives of the study:-
The objectives of the study are as follow:-
 To examine the effect of monetary policy measures on economic growth:-
By conducting this research, we are assessing the effect of monetary policy measures e.g.
changes in policy rate on economic factors such as investment, consumption etc.

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 To inspect the effect of other macroeconomic variables on economic growth:-

We are conducting this study to inspect the effect of other macroeconomic variables e.g.
exchange rate on the economic growth.
1.4 Significance of the study:-
The research on the study of the “effect of monetary policy measures on economic growth”
not only provides value to various policy makers, stakeholders, and economists etc but it also
suggest some measures for the advancement of the field under study.
The following points regarding the importance of the research are as follow:-
 Better understanding of the monetary policy:-
By studying this research, many students can easily increase their understanding of the relation
between monetary policy measures and economic growth.
 Reliable decision making:-
As the research provides the information that how the monetary policy can be effectively utilized
to achieve the economic objectives. This information will help the policy makers to make
reliable and informed decisions which in turn increase the economic growth.
 To provide guidance to investors:-
By using this research, the investors are in the better position to understand the link between
monetary policy measures and economic growth and makes improved investment decision. And
this in not also only increase investor confidence but also accelerate the economic growth.
 To serve as a foundation of future research:-
The findings of this research not only serve as a foundation for future research but also help in
the advancement of the field of monetary policy and economic growth.
 To achieve economic growth through policy implementation:-
The findings of this study provide assistance in the implementation of effective monetary policy
measures and stimulate economic growth.

Chapter 2: Review of literature

2.1 Review of literature:-

 Lee et al. (2019) investigated the effect of monetary policy on economic development in
China by using the data from 1990 to 2018. He conducted an analysis using a vector

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regression model (VAR) to examine the impact of factors, such, as money supply, interest
rates, inflation, real exchange rates and external reserves on the country’s domestic product
(GDP). The findings indicate that the exchange rate and interest rate have a positive effect on
GDP. However the influence of inflation and money supply is not statistically significant.
These outcomes suggest that utilizing money supply as a monetary policy instrument does
not significantly impact Chinas GDP growth.
 In another study by Haidar and Khan (2017), they empirically investigated the relationship
between policy and economic growth in Pakistan. Their research utilized time interval data
spanning from 1995 to 2015. Employed the Vector Autoregression (VAR) model, the authors
discovered a correlation between changes in interest rates and money supply with GDP
growth in Pakistan. This indicates that monetary policy plays a role in influencing
development, within the country.
 In a study conducted by Mushtaq and Siddiqui (2015), they explored the connection,
between policy and economic development in India. Analyzing data from 1980 to 2010 they
utilized an error correction model to examine the impact of money supply, interest rates,
inflation rates, real exchange rates and external reserves on GDP. The findings demonstrated
a significant correlation between money supply and economic growth indicating that the
monetary policy has effectively contributed to fostering development in India.
 Another research conducted by Yousuf and Bukhari (2018) delved into the influence of
policy on development in Bangladesh. By analyzing data from 1995 to 2015 using the
Autoregressive Distributed Lag (ARDL) approach they observed a relationship between
changes in interest rates and GDP growth. These results highlight the efficacy of policy in
stimulating development in Bangladesh.
 Similarly Khalid et al. (2016) investigated the impact of policy on development in the
United Arab Emirates using data from 2000 to 2014. They employed regression analysis
which revealed a positive effect of money supply on GDP. This suggests that monetary
policy has played a role in promoting growth in UAE.
 Furthermore, Rahman and Shahbaz (2017) analyzed data spanning from 1985 to 2015 to
explore the relationship between policy, economic growth and income inequality in
Bangladesh. The research employed the Vector Error Correction Model (VECM), discovered

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an optimistic connection between the money supply and economic development. It

highlighted the role of tackling income inequality in ensuring economic growth.
 Adebayo and Adebiyi (2018) conducted a time series analysis of the impact of monetary
policy, on economic development in Nigeria. They examined the data from 1980 to 2016 and
discovered a positive relationship between changes in money supply and GDP growth. This
suggests that monetary policy has had an influence on Nigeria’s development.
 In this research, Chen et al. (2019) investigated the effects of monetary policy in Vietnam
using data from 1990 to 2018. Through the use of the vector model (VAR), they found a
meaningful correlation between interest rates and real GDP, indicating that monetary policy
has been effective in fostering economic growth in Vietnam.
 Shah et al. (2020) focused their research on exploring the connection between policy and
economic development in Malaysia by analyzing data spanning from 1995 to 2017. Utilizing
the structural vector regression model (SVAR), their study established a positive impact of
money on real GDP, providing evidence for the pivotal role played by monetary policy in
driving Malaysia’s economic development.
 Adelakun and Okodua (2017) revisited the link between monetary policy and economic
development in South Africa, utilizing data collected from 1985 to 2016. By employing the
Vector Error Correction Model (VECM), they uncovered optimistic effects of money supply
on GDP growth, further supporting the notion that monetary policies contribute significantly
to South Africa’s overall economic progress.
 Oao and Fosu (2015) delved into the relationship between monetary policy and economic
development in Ghana, using data from 1990 to 2014. Their study revealed an optimistic
correlation between money supply and real GDP, indicating that monetary policy is indeed
effective in promoting economic growth in Ghana.

 Zhang et al. (2022) conducted research to explore the connection between monetary policy
uncertainty and economic development in China. They used a dynamic panel data approach
using a sample covering the period 2001 to 2019. They examined how uncertainty
surrounding policy decisions affects variables such as investment, consumption and GDP
growth. The findings demonstrated that higher levels of monetary policy uncertainty have a

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pessimistic impact on growth, underscoring the importance of maintaining stability and

predictability in monetary policy to foster growth in China.

Chapter 3: Methodology

3.1 Information:-
We will be using time series data from 1995 to 2015 to investigate how monetary policy
measures affect growth. Time series data comprises observations collected at intervals like
monthly or quarterly for a set of variables. The data is taken from World Bank, Economic survey
of Pakistan and State Bank of Pakistan. The dataset will include details, on policy measures such
as interest rates, money supply and other indicators relevant to policies. Additionally it will
encompass macroeconomics variables, like growth rate, investment, consumption and inflation.
3.2 Variables:-
Dependent Variable:-The dependent variable in this research will be measured by using real
GDP at constant rate, using a specific base year. The choice of base year will depend on
available data and the specific context of the study. This shows the overall expansion or
contraction of the economy.
Independent Variables:-Independent variables include various measures of monetary policy,
such as changes in policy interest rates (policy rate or key rate), the growth rate of the money
actions (M2) and interventions and their potential effects on the economy.
Other variables:-Other variables can be included in the account of other factors that can affect
economic growth, such as fiscal policy indicators (government spending, tax rates), exchange
rates, trade openness, and demographic variables. These variables help isolate the specific effects
of monetary policy actions on economic growth.
3.3 Model Specifications:-
The choice of the model employed in a study relies on the research objective and the
characteristics of the data. Our analysis will utilize the Ordinary Least Squares (OLS) model to
examine how monetary policy measures impact economic growth. This model captures the
dynamic interaction between variables over time.
The economic equation for this economic model are as follows:-
Y t =f (M 2t , ERt , Gt , ¿t )

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Y t =f (r t , ERt , Gt , ¿t )
Where
Yt=GDP in year t.
M2t=Money supply
ERt=exchange rate
Gt=government spending
rt= policy rate
TOt = trade openness
So, the regression equations are:-
Y t =α 0 +α 1 M 2 t +α 2 ERt + α 3 Gt + α 4 ¿ t +ε 1

Y t =β 0 + β 1 r t + β2 ERt + β 3 Gt + β 4 ¿t + ε 2

3.4 Procedure:-
The research methodology for this study will include time series analysis, which is a statistical
technique used to analyze patterns and relationships in time series data. Time series analysis
includes several tools and techniques:-
Descriptive Statistics:-We will employ descriptive statistics to provide a summary and
description of the attributes of variables such as mean, the standard deviation and correlation
coefficient.
Estimation Method:- To estimate the parameters of the model and ascertain the connection
between variables we will utilize methods, like Least Squares (OLS).
Diagnostic Tests:-Diagnostic tests including autocorrelation, heteroscedasticity and serial
correlation tests will be conducted to ensure the reliability and validity of the proposed model.
3.5 Data Processing Tools:-
The data processing instrument used in this research is EViews. EViews is a popular software
package for econometric analysis and time series modeling. It provides a user-friendly interface
for data management, statistical analysis, model estimation and forecasting. EViews allows you

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to efficiently process data, estimate econometric models, and produce graphical results, making
it ideal for time series analysis needed in research projects.
Justification:-
The selected approach of conducting time lapse analysis is appropriate, for this research study as
it enables us to examine the correlation between policy measures and economic growth across
time periods. By employing time series analysis we can uncover patterns, trends and dynamics
within the data thereby facilitating an evaluation of the influence of policy, on growth. This
study employs models and statistical methods to gather evidence regarding the cause and effect
relationship, between monetary policy measures and economic growth. It also takes into account
factors that could potentially influence monetary outcomes. Using EViews as a data processing
tool ensures efficient analysis and accurate interpretation of results.

Section II

A. Introduction of the student:-

1. Last Degree Obtained:- B.Sc (Mathematics, Statistics, Economics)
2. Employment Status:- Currently unemployed due to study

B. Bibliography:-
 Li H., Seng L. S., & Yu J. (2019). The Impact of Monetary Policy on Economic Growth in
China. Journal of Asian Economics, 64, 101170.
 Haider M. Z., & Khan I. (2017). Does Monetary Policy Influence Economic Growth in
Pakistan? An Empirical Analysis. South Asian Journal of Global Business Research, 6(1),
98-115.
 Mushtaq K., & Siddiqui D. A. (2015). Monetary Policy and Economic Growth: Evidence
from India. Journal of Economics and Sustainable Development, 6(9), 102-109.
 Yousaf M. A., & Bukhari S. A. H. (2018). Impact of Monetary Policy on Economic Growth
in Bangladesh. Global Business Review, 19(3), 707-719.

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 Khalid A., Ahmed A., & Saeed K. (2016). Does Monetary Policy Affect Economic Growth?
Evidence from the United Arab Emirates. International Journal of Economics and Finance,
8(7), 45-54.
 Rahman M. M., & Shahbaz M. (2017). The Dynamic Links Between Monetary Policy,
Economic Growth, and Income Inequality in Bangladesh. Emerging Markets Finance and
Trade, 53(1), 122-136.
 Adebayo A. A., & Adebiyi M. A. (2018). Monetary Policy and Economic Growth in Nigeria:
A Time Series Analysis. European Journal of Business and Management, 10(11), 12-22.
 Chen Y., Li J., & Zeng Z. (2019). The Effect of Monetary Policy on Economic Growth in
Vietnam: A Time Series Analysis. Emerging Markets Finance and Trade, 55(9), 1922-1934.
 Shah S. S., Rehman A. U., & Hussain I. (2020). Monetary Policy and Economic Growth: A
Case Study of Malaysia. Journal of Economic Integration, 35(2), 383-402.

 Adelakun O. J., & Okodua H. (2017). Monetary Policy and Economic Growth Nexus in
South Africa: An Empirical Re-examination. Journal of Economics and Behavioral Studies,
9(4), 182-191.
 Yao M. C., & Fosu G. O. (2015). The Impact of Monetary Policy on Economic Growth in
Ghana. Journal of Economics and International Finance, 7(3), 44-52.
 Zhang D., Wang Y., & Shen Z. (2022). Monetary policy uncertainty and economic growth:
Evidence from China. Journal of Asian Economics, 80, 101365.

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