Impact of Monetary Policy on Private Investment

Abstract

In this paper, the impact of real discount rate, government investment and foreign direct investment on private investment in Pakistan, both in short run and long run, has been investigated by using annual time series data over the period of 1975-2015. The research includes Augmented Dickey Fuller (ADF) unit root test, Johansen and Juuselieus?s co-integration technique, Auto Regressive Distributed Lag (ARDL) bound testing model, Error Correction Model (ECM) and Causality Analysis to support the various findings. Results of ECM and Cointegration analysis suggests that a significant negative short and long run relationship exists between private investment and real discounted rate of return. Whereas, causality analysis confirms the unidirectional causality exists between real discounted rate of return and private investment. It is therefore recommended that both, government and monetary institution of Pakistan has to be very clear and careful while formulation monetary policy, especially with reference to enhance the private investment in the country.