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The study provides an empirical update on the impact of an unanticipated change in monetary policy on output growth and inflation in Pakistan. We use high frequency data and multivariate structural vector auto-regressions technique with long run restrictions based on standard aggregate demand and supply model of the economy. The results indicate that an unanticipated positive shock in monetary policy leads to: (i) an increase in industrial output, which revert to its original level over 23 to 32 month horizon; (ii) an increase in inflation; and (iii) nominal shocks remained the dominant factor in explaining variation in inflation as compared to supply disturbances. Transmission mechanism is much faster in case of Consumer Price Index (CPI) compared to Industrial Production Index (IPI), as over 75 percent increase in CPI is realized during 12 months after the shock and this impact reaches the level of over 90 percent during 18 months. Sensitivity of these results to another specification indicates that response patterns of both IPI and CPI remain unchanged.
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