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Exchange Market Pressure and Monetary Policy : Evidence from Pakistan

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  • M. Idrees Khawaja

    (PIDE)

Abstract

The study employs Girton and Roper (1977) measure of exchange market pressuresum of exchange rate depreciation and foreign reserves outflow, to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and 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 increase in exchange market pressure (during 199198) is imprudent. The result suggests that fiscal needs/growth objective might have dominated the external account considerations during the span. Post 9/11 there is evidence of sterilised intervention in forex market. Interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (199198). The finding implies that for 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 Info

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22208.

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Date of creation: Jan 1970
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Handle: RePEc:eab:macroe:22208

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Keywords: monetary policy; Foreign Exchange;

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References

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  1. Flood, Robert P & Jeanne, Olivier, 2000. "An Interest Rate Defence of a Fixed Exchange Rate?," CEPR Discussion Papers 2507, C.E.P.R. Discussion Papers.
  2. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-48.
  3. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  4. Gochoco-Bautista, Maria Socorro & Bautista, Carlos C., 2005. "Monetary policy and exchange market pressure: The case of the Philippines," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 153-168, March.
  5. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  6. Connolly, Michael & Dantas da Silveira, Jose, 1979. "Exchange Market Pressure in Postwar Brazil: An Application of the Girton-Roper Monetary Model," American Economic Review, American Economic Association, vol. 69(3), pages 448-54, June.
  7. Evan Tanner, 2002. "Exchange Market Pressure, Currency Crises, and Monetary Policy," IMF Working Papers 02/14, International Monetary Fund.
  8. Joseph Beaulieu, J. & Miron, Jeffrey A., 1993. "Seasonal unit roots in aggregate U.S. data," Journal of Econometrics, Elsevier, vol. 55(1-2), pages 305-328.
  9. Parkin, Michael, 1976. " Comment on M. Mussa, "The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating."," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 249-54.
  10. Evan Tanner, 1999. "Exchange Market Pressure and Monetary Policy," IMF Working Papers 99/114, International Monetary Fund.
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Cited by:
  1. Stavarek, Daniel & Dohnal, Marek, 2009. "Exchange Market Pressure in Central Europe: An Application of the Girton-Roper Model," MPRA Paper 15744, University Library of Munich, Germany.

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