Money supply and fisher effect in Pakistan
(Faiza Asif, nankana sahib)
Money Supply and Fisher’s
effect in Pakistan:
The great economist Irving Fisher projected the Fisher effect which is an
important economic belief which basically describe the affiliation in between
interest rate and inflation. Real and nominal interest rates are negatively and
positively related with inflation, respectively. It has a vital implementation
in the policy making of the country’s economy. The SBP uses the fisher’s
framework for the set up of the monetary policy of the Pakistan.Inflation is
very welcomed issue in the world. Unimproved Balance of Payment is just because
of the rise in price level which is basically inflation. The SBP controls the
monetary policy by applying different tools level. In such case the money
increases in the economy which causes the increase in invest. The SBP control
the supply of the money by applying easy monetary policy and tight monetary
policy :
• If the central bank increases the money supply which causes the decrease in
the interest rate and increase in the income ment level, productivity and in
income level also.
• If the central bank decreases the supply of money, which causes the rise in
the rate of interest and decline in the level of income. This increment in the
interest rate causes the low level of the investment, productivity and output
also.
Money supply is basically described by the LM curve which is known as capital
market. At the low interest rate the people invest more and vice versa. In the
nominal interest rate people earn more benefits because they added the expected
rate of inflation in the real interest rate, they save themselves from bearing
the extra cost in the form of inflation, because inflation may be occurs any
time in the future. So the nominal interest rate shows the Fishers effect in the
economy.
Conclusion:
It is concluded that the Fisher effect and money supply both play a vital role
in the economic growth of the country like Pakistan. Nominal interest rate is
beneficial for the economy. The SBP protects the economic growth by making the
different policies in the Pakistan, and the nominal interest should be chosen to
make the investments because there will be no chance of facing the inflation
which occurs in future.