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Adopting Inflation Targeting in Pakistan: An Empirical Analysis

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  • Nadia Saleem

    ()
    (FCC University, Lahore, Pakistan.)

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    Abstract

    The objective of this paper is to assess the conditions for inflation targeting in Pakistan. The recent inflationary surge in Pakistan calls for rethinking monetary policy afresh. This paper argues the case for inflation targeting in Pakistan as a policy option to achieve price stability. The country experienced an inflation rate of just below 10 percent during 1970-2009, which makes it a potential candidate for inflation targeting. Applying the VAR technique to data for the same period, inflation is shown to be adaptive in nature, leading us to reject the accelerationist hypothesis. The Lucas critique holds as people are found to use forward-looking models in forming expectations about inflation. The paper also sheds some light on the State Bank of Pakistan’s level of preparedness for the possibility of adopting inflation targeting, for which transparency and autonomy are prerequisites. The interest rate channel can play the role of a nominal anchor in the long run.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 15 (2010)
    Issue (Month): 2 (Jul-Dec)
    Pages: 51-76

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    Handle: RePEc:lje:journl:v:15:y:2010:i:2:p:51-76

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    Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx
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    Related research

    Keywords: Monetary policy; central bank; inflation targeting; Pakistan.;

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    1. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
    2. Gottschalk, Jan & Moore, David, 2001. "Implementing Inflation Targeting Regimes: The Case of Poland," Journal of Comparative Economics, Elsevier, vol. 29(1), pages 24-39, March.
    3. Laurence Ball & N. Gregory Mankiw & Ricardo Reis, 2003. "Monetary Policy for Inattentive Economies," NBER Working Papers 9491, National Bureau of Economic Research, Inc.
    4. Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc.
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    6. McCallum, Bennett T. & Nelson, Edward, 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Seminar Papers 644, Stockholm University, Institute for International Economic Studies.
    7. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
    8. Victor Gaiduch & Ben Hunt, 2000. "Inflation Targeting Under Potential Output Uncertainty," IMF Working Papers 00/158, International Monetary Fund.
    9. Viktor Kotlan & David Navratil, 2003. "Inflation Targeting as a Stabilisation Tool: Its Design and Performance in the Czech Republic," Macroeconomics 0310006, EconWPA.
    10. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
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    12. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
    13. Victor Gaiduch & Benjamin Hunt, 2000. "Inflation targeting under potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2000/08, Reserve Bank of New Zealand.
    14. Michael S. Hanson & Kwanghee Nam, 2005. "Inflation Targeting in an Emerging Market: the Case of Korea," Wesleyan Economics Working Papers 2005-007, Wesleyan University, Department of Economics.
    15. Benjamin Hunt, 2000. "Inflation Targeting Under Potential Output Uncertainty," Computing in Economics and Finance 2000 180, Society for Computational Economics.
    16. By Alexander W. Hoffmaister, 2001. "Inflation Targeting in Korea: An Empirical Exploration," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 5.
    17. Ferya Kadioglu & Nilufer Ozdemir & Gokhan Yilmaz, 2000. "Inflation Targeting in Developing Countries," Discussion Papers 0006, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    18. Yifan Hu, 2003. "Empirical Investigations of Inflation Targeting," Working Paper Series WP03-6, Peterson Institute for International Economics.
    19. Soyoung Kim & Yung Chul Park, 2006. "Inflation targeting in Korea: a model of success?," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in Asia: approaches and implementation, volume 31, pages 140-164 Bank for International Settlements.
    20. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
    21. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    22. Wasim Shahid Malik & Ather Maqsood Ahmed, 2010. "Taylor Rule and the Macroeconomic Performance in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(1), pages 37-56.
    23. Terry McKinley, 2007. "Why Is Africa Constrained from Spending ODA?," One Pager 34, International Policy Centre for Inclusive Growth.
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