Central bank intervention, sterilization and monetary independence: the case of Pakistan
AbstractThis paper analyzes the response of the State bank of Pakistan—the central bank, to foreign exchange inflows for the period of 2001:1 to 2006:8. In this context, we estimated sterilization and offset coefficients using vector autoregression (VAR) model to account for the issue of endogeneity of domestic credit with the foreign exchange interventions. In addition, the paper also analyzes the role of foreign and domestic interest rate differentials in pulling in or pushing out of these foreign exchange flows. We found that the offset coefficient is very small and insignificant (0.16) implying that changes in credit resulted in very minimal offsetting reserve flows. The study found out that for the sample period, SBP only partially sterilized the inflows with magnitude of coefficient at (0.50) confirming the stylized facts. Results also indicate that inflows were neither pulled into the country due to high domestic interest rates due to some domestic policy nor they are pushed into Pakistan owing to low interest rates abroad.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 2328.
Date of creation: 16 Mar 2007
Date of revision: Mar 2007
Sterilization; Monetary independence; VAR;
Find related papers by JEL classification:
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-24 (All new papers)
- NEP-CWA-2007-03-24 (Central & Western Asia)
- NEP-IFN-2007-03-24 (International Finance)
- NEP-MAC-2007-03-24 (Macroeconomics)
- NEP-MON-2007-03-24 (Monetary Economics)
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