Might these recent shocks change the decades-long trend of declining neutral rate? In my view, these shocks will most probably not fundamentally reverse this trend. There are some questionable aspects, however, regarding productivity, potential growth and how they change with globalization. Allow me to elaborate. Potential output growth has been significantly negatively impacted by the Global financial crisis and has not fully recovered since.
With demand pressures expected to grow, SBP will continue to pursue monetary tightening but there will be need to strike an appropriate balance between promoting economic growth  7  4  As reported by Statistics Department, State Bank of Pakistan  BIS Review 71/2006  and price stability. Over the medium term, Pakistan is well positioned to deal with these emerging trends effectively.