Simulation Analysis of Short and Long Run Shocks

Syed Kashif Saeed and Eatzaz Ahmad

Abstract

This paper traces the effects of temporary and permanent changes in price level, GDP, money supply, interest rate, exchange rate and foreign exchange reserves by using a six-variable VAR model. The main findings are that; GDP growth in the long run pressurizes prices due to which inflation keeps on increasing along with GDP. An exogenous increase in prices results an increase in GDP in short run but in long run it depresses the output. Therefore, there is an evidence of optimum rate of inflation with respect to output growth and targeted inflation rate is not necessary to become zero.