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Monetary Policy Stance: Comparison of Different Measures for Pakistan

Author

Listed:
  • Muhammad Nadeem Hanif

    (State Bank of Pakistan)

  • Sajawal Khan

    (State Bank of Pakistan)

  • Muhammad Rehman

    (State Bank of Pakistan)

Abstract

This paper estimates monetary policy stance measures like Monetary Conditions Index (MCI), Financial Conditions Index (FCI), and Bernanke and Mihov Index (BMI) for Pakistan. The estimated monetary policy stance guides whether the policy is tight, neutral or loose relative to its objectives. And thus, it may help policy maker adjusting policy instrument(s) to guide the economy in desired direction. It also helps in knowing which monetary policy transmission channel is more effective along with the impact of various monetary policy measures upon the desired goals. Despite the fact that supply shocks are found to be dominant in Pakistan which gives little room to monetary policy to play an effective role as stabilizing tool, movements in exchange rate and monetary aggregates turned out to be more important than the interest rate in policy transmission mechanism. Being a small open economy facing persistent current account deficits, exchange rate consideration thus played major role in monetary policy transmission in Pakistan. State Bank of Pakistan had been targeting monetary aggregate until recently and just recently started active use of interest rate as policy instrument. It may take some time for interest rate channel to take lead. The comparison of different estimated measures shows that MCI performs better as measure of monetary policy stance (compared to FCI and BMI) in the case of Pakistan.

Suggested Citation

  • Muhammad Nadeem Hanif & Sajawal Khan & Muhammad Rehman, 2016. "Monetary Policy Stance: Comparison of Different Measures for Pakistan," SBP Working Paper Series 73, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:73
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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp73.pdf
    File Function: First version, 2016
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    Cited by:

    1. Malik, M. Fahad & Awan, Dr Masood Sarwar & Malik, Dr Waseem Shahid, 2020. "Macroeconomic Shocks: Short-Run versus Long-Run Perspectives," MPRA Paper 99103, University Library of Munich, Germany.

    More about this item

    Keywords

    Financial markets and macroeconomy; monetary policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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