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Monetary Policy Objectives in Pakistan: An Empirical Investigation

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  • Wasim Shahid Malik

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

The Taylor rule (1993) focuses only on two objectives: output and inflation. In practice, the central bank’s loss function (especially in developing countries) contains objectives other than these two, like the interest rate smoothing, exchange rate stabilisation, etc. In this study, the monetary policy reaction function has been estimated, including five objectives for monetary policy as well as controlling for the effect of three other factors. Whereas the results confirm the counter-cyclical response of monetary policy to the factors in the loss function, the response of interest rate to changes in the foreign exchange reserves and the government borrowing has been negative. Variance decomposition shows that most of the variation in the interest rate is explained by its own lagged values. Other variables, in explaining variation in the interest rate, can be ranked as inflation, government borrowing, exchange rate, output gap, trade deficit, and, finally, the foreign exchange reserves.

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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2007:35.

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Length: 25 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:pid:wpaper:2007:35

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Keywords: Monetary Policy Objectives; Variance Decomposition; Call Money Rate;

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References

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Citations

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Cited by:
  1. Zakir, Nadia & Malik, Wasim Shahid, 2013. "Are the effects of monetary policy on output asymmetric in Pakistan?," Economic Modelling, Elsevier, vol. 32(C), pages 1-9.
  2. Inayat Ullah Mangla, 2011. "Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 30-70, September.
  3. Wasim Shahid Malik & Ather Maqsood Ahmed, 2007. "The Taylor Rule and the Macroeconomic Performance in Pakistan," PIDE-Working Papers 2007:34, Pakistan Institute of Development Economics.
  4. Syed Kumail Abbas Rizvi & Bushra Naqvi & Sayyid Salman Rizavi, 2012. "What Does Pakistan Have to Join the Inflation Targeters’ Club—a Royal Flush or a Seven-Deuce Offsuit?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(2), pages 35-62, July-Dec.
  5. Mohsin S. Khan, 2009. "The Design and Conduct of Monetary Policy: Lessons for Pakistan (The Quaid-i-Azam Lecture)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 48(4), pages 337-356.

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