Exchange Market Pressure and Monetary Policy: Evidence from Pakistan
AbstractThe study employs Girton and Roper (1977) measure of exchange market pressure—sum 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 1991–98) 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 (1991–98). 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 InfoPaper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2007:31.
Length: 24 pages
Date of creation: 2007
Date of revision:
Monetary Policy; Foreign Exchange;
Other versions of this item:
- M. Idrees Khawaja, 2007. "Exchange Market Pressure and Monetary Policy: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 12(2), pages 83-114, Jul-Dec.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-09 (All new papers)
- NEP-CBA-2007-09-09 (Central Banking)
- NEP-CWA-2007-09-09 (Central & Western Asia)
- NEP-IFN-2007-09-09 (International Finance)
- NEP-MAC-2007-09-09 (Macroeconomics)
- NEP-MON-2007-09-09 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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