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Monetary Policy Reaction Function in Open Economy Version: Empirical Evidence in Case of Pakistan

Author

Listed:
  • Mohammad, Sulaiman D.
  • Hussain, Adnan
  • Ahsannudin, Mohammad
  • Kazmi, Shazia
  • Lal, Irfan

Abstract

Aftermath the globalization and financial liberalization the purpose of monetary policy deviates from economic growth to economic stabilization. Therefore monetary authority adjusts its policy rate in response to systematic changes in macroeconomic activities and business fluctuations. The rule which is followed to stable an economy at development path is called Taylor’s rule. This study empirically investigates monetary policy reaction function in case of Pakistan by applying Taylor’s rule (1993) nevertheless Johansan co integration test is employed for its open economy version. The results depicted that inflation does not play significant role due to the monetary policy as such in the frame work of Pakistan’s economy. Therefore inflation targeted monetary policy does not suggest for Pakistan. To analyze the stability of coefficient ROLLING WINDOW technique was employed as it is found that monetary authority adopted inflation targeted monetary policy after 2002 which was not suitable as this study has shown.

Suggested Citation

  • Mohammad, Sulaiman D. & Hussain, Adnan & Ahsannudin, Mohammad & Kazmi, Shazia & Lal, Irfan, 2012. "Monetary Policy Reaction Function in Open Economy Version: Empirical Evidence in Case of Pakistan," MPRA Paper 106878, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:106878
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    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
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    5. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Taylor’s rule; inflation gap; output gap; exchange rate gap;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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