Exchange Market Pressure and Monetary Policy: Evidence from Pakistan
AbstractThe study employs the Girton and Roper (1977) measure of exchange market pressure (defined as the sum of exchange rate depreciation and foreign reserves outflow), to examinethe interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and the interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increases in exchange market pressure (during 1991-98) was imprudent. The results suggest that fiscal needs/growth objectives might have dominated external account considerations during this period. Post 9/11 there is evidence of sterilized intervention in the forex market. The interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991-98). The finding implies that, for the interest rate to work as tool of monetary policy vis-a-vis exchange market pressure, a reasonable degree of capital mobility is called for.
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Bibliographic InfoArticle provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.
Volume (Year): 12 (2007)
Issue (Month): 2 (Jul-Dec)
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Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx
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Other versions of this item:
- M. Idrees Khawaja, 2007. "Exchange Market Pressure and Monetary Policy: Evidence from Pakistan," PIDE-Working Papers 2007:31, Pakistan Institute of Development Economics.
- M. Idrees Khawaja, 1970. "Exchange Market Pressure and Monetary Policy : Evidence from Pakistan," Macroeconomics Working Papers 22208, East Asian Bureau of Economic Research.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F31 - International Economics - - International Finance - - - Foreign Exchange
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