Impact of macroeconomic and monetary policy uncertainty shocks on economic growth- an empirical study of Pakistan

Author Identifiers

Hina Chaudhry


Date of Award


Degree Type


Degree Name

Master of Business by Research


School of Business and Law

First Advisor

Zhaoyong Zhang

Second Advisor

Deepa Bannigidadmath

Third Advisor

Anna Golab


This study investigates the response of economic growth to macroeconomic and monetary policy uncertainty shocks under different financial conditions using data from Pakistan.

Macroeconomic uncertainty is argued to slow down the recovery of economies after recessions. Further research shows that country’s financial conditions play an important role in the uncertainty – economic growth relationship. Pakistan is an example of critically deteriorating developing economies and has faced significant challenges in economic growth associated with uncertainties in policies. However, there is a lack of in-depth analysis of uncertainty – economic growth relationship when it comes to Pakistan. A review of the sparse literature on Pakistan reveals four key gaps in the literature. First the extant studies suffer methodological biases due to the unavailability of high-frequency data. Second, the critical channel of financial frictions has to date been ignored. Third, the existing literature on Pakistan does not use comprehensive economic uncertainty proxies in their analysis. Fourth, there is no consensus on the best available uncertainty proxies, while there exist some sophisticated economic policy uncertainty indices used in the literature on developed economies.

The critical impact of macroeconomic uncertainty on economic growth and the deteriorating economic conditions in Pakistan motivate this study to address the above gaps in the literature. This is achieved through three key steps. First, along with the established monetary policy uncertainty measure, this study develops a new comprehensive macroeconomic uncertainty variable. Second, the study analyses whether the financial friction in Pakistan affects the impact of uncertainty on economic growth. Third, the study fills the gaps in methodological approaches by using alternative economic growth indicators and monthly data for vector autoregression analysis (VAR). The direction and magnitude of the impact of uncertainty shocks on the economic growth variable are reported through impulse response functions. The contribution of uncertainty shocks in explaining the variation in our macroeconomic indicators is reported through variance decomposition factor analysis. The VAR specifications are then tested for the robustness of Cholesky ordering and the identification of VAR using a Bayesian approach.

The major findings of the study are consistent with the literature and provide empirical evidence of a negative relationship between economic growth and both macroeconomic and monetary policy uncertainties. Additionally, consistent with the literature, this study shows evidence that financial friction exacerbates the negative impact of monetary policy uncertainty on the economic growth of Pakistan. However, contrary to previous research, the study finds that financial friction does not enhance the negative impact of macroeconomic uncertainty.The findings of this study are highly relevant to the regulators, policymakers and investors alike. It provides an empirical understanding of the behaviour of economic growth under uncertain macroeconomic and policy conditions. It also shows that the role of financial conditions cannot be ignored when devising strategies to mitigate the adverse economic impact of monetary policy uncertainty.

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