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Monetary Conditions Index: A Composite Measure of Monetary Policy in Pakistan

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  • Qayyum, Abdul

Abstract

This paper estimated Monetary Conditions Index (MCI) of inflation variable for Pakistan by using monthly data from June 1990 to June 2001. Before calculating MCI we have estimated weights of interest rate and exchange rate to be used in the construction of MCI. For this purpose we used unit root analysis and Johenson (1988) maximum likelihood method base on vector autoregressive technology. The estimated monetary conditions ratio for Pakistan is around 2.79:1. Finally we have constructed the MCI by utilising the estimated weights of rate of interest and exchange rate. The analysis indicate overall tight monetary policy during the decade. However there is some easing spell during 1997 to 1999. This shows the determinedness of monetary authorities with objective of keeping inflation low. Low inflation at the end of the decade indicates the success of monetary authorities in the conduct of monetary policy in achieving the target of low inflation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2153.

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Date of creation: 2002
Date of revision: 2002
Publication status: Published in The Pakistan Development Review 4.41(2002): pp. 551-566
Handle: RePEc:pra:mprapa:2153

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Keywords: Monetary Conditions Index (MCI); Monetary policy; Cointegraion; Pakistan;

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  1. Nicoletta Batini & Kenny Turnbull, 2000. "Monetary Conditions Indices for the UK: A Survey," Discussion Papers, Monetary Policy Committee Unit, Bank of England 01, Monetary Policy Committee Unit, Bank of England.
  2. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series, Institute for Advanced Studies 10, Institute for Advanced Studies.
  3. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  4. Kari H. Eika & Neil R. Ericsson & Ragnar Nymoen, 1996. "Hazards in implementing a monetary conditions index," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 568, Board of Governors of the Federal Reserve System (U.S.).
  5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
  6. Faiz Bilquees, 1988. "Inflation in Pakistan: Empirical Evidence on the Monetarist and Structuralist Hypotheses," The Pakistan Development Review, Pakistan Institute of Development Economics, Pakistan Institute of Development Economics, vol. 27(2), pages 109-129.
  7. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 39-61, February.
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Cited by:
  1. Sajawal Khan & Abdul Qayyum, 2007. "Measures of Monetary Policy Stance : The Case of Pakistan," Macroeconomics Working Papers 22201, East Asian Bureau of Economic Research.

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