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The Taylor Rule and the Macroeconomic Performance in Pakistan

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Author Info

  • Wasim Shahid Malik

    (Pakistan Institute of Development Economics, Islamabad.)

  • Ather Maqsood Ahmed

    (Central Board of Revenue, Islamabad.)

Abstract

A widely agreed proposition in modern economics is that policy rules have greater advantage over discretion in improving economic performance. Simple monetary policy instrument rules are feasible options for developing countries lacking the pre-requisites for more sophisticated targeting rules. Notwithstanding the focus of modern literature on the issue, the State Bank of Pakistan (SBP) has never declared itself to be following any type of rule. Surprisingly, this topic has remained out of research focus (among the academia and the practitioners) in Pakistan. This is the first attempt to deal with a rule-based monetary policy strategy in the case of the SBP. We have estimated the Taylor rule and simulated the economy using this rule as a monetary policy strategy. Our results indicate that the SBP has not been following the Taylor rule. In fact, the actual policy can be taken as an extreme deviation from it. On the other hand, counterfactual simulation confirms that macroeconomic performance can be improved, in terms of stability in inflation and output, when a simple Taylor rule is adopted. In this regard the parameter values (especially the inflation target) in the rule must be set according to the conditions of the economy under consideration rather than by relying on the ones suggested by the Taylor rule.

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File Function: First Version, 2007
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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2007:34.

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Length: 28 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:pid:wpaper:2007:34

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Keywords: Taylor Rule; Macroeconomic Performance; Counterfactual Simulation;

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References

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  1. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 99-118, Fall.
  2. Wasim Shahid Malik, 2007. "Monetary Policy Objectives in Pakistan : An Empirical Investigation," Macroeconomics Working Papers 22212, East Asian Bureau of Economic Research.
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  17. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2008. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," MPRA Paper 19488, University Library of Munich, Germany.
  2. Syed Kumail Abbas Naqvi & Bushra Naqvi, 2010. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 1-33, Jul-Dec.
  3. Hassan, Rubina & Shahzad, Mirza Muhammad, 2011. "A macroeconometric framework for monetary policy evaluation: A case study of Pakistan," Economic Modelling, Elsevier, vol. 28(1), pages 118-137.
  4. Wasim Shahid Malik & Musleh-ud Din, 2008. "Monetary Policy Transparency in Pakistan : An Independent Analysis," Macroeconomics Working Papers 22214, East Asian Bureau of Economic Research.
  5. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2009. "Inflation Volatility: An Asian Perspective," MPRA Paper 19489, University Library of Munich, Germany.
  6. Ahmed, Waqas & Rehman, Muhammad & Malik, Jahanzeb, 2013. "Quarterly Bayesian DSGE Model of Pakistan Economy with Informality," MPRA Paper 53168, University Library of Munich, Germany.

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