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What Does Pakistan Have to Join Inflation Targeters Club, A Royal Flush or A Seven-Deuce Offsuit?

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  • Naqvi, Bushra
  • Rizvi, Syed Kumail Abbas

Abstract

The economic and institutional structure required for successful adoption and implementation of Inflation Targeting (IT) framework is often lacking in Emerging economies. In this paper, we evaluate these structures for the economy of Pakistan both qualitatively and quantitatively. Although our comprehensive assessment identifies non-realization of many core requirements but as literature and real time experience pointed out that IT can be a framework for emerging economies even in the absence of these conditions, we go further by investigating that if State Bank of Pakistan (SBP) decides to adopt IT, does there exist a stable and significant relationship between policy rate (monetary tool) and inflation measure (objective)? This bivariate relationship is important to be analyzed given the important role of interest rate in mitigating the deviations between actual and target inflation while working within the IT framework. To illustrate this relationship, we use Granger Causality test and our estimates fail to find any significant link between interest rate and inflation. On the basis of overall findings, this study suggests that Pakistan, due to the absence of most fundamental requirements of IT, is perhaps not ready for Inflation Targeting yet.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19575.

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Date of creation: Sep 2008
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Handle: RePEc:pra:mprapa:19575

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Keywords: Inflation Targeting; Pakistan; Monetary policy;

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  1. International Monetary Fund, 2005. "Inflation Targeting Lite' in Small Open Economies," IMF Working Papers 05/172, International Monetary Fund.
  2. Guy Debelle, 1998. "Inflation Targeting in Practice," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ23, June.
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