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Exchange Market Pressure and Monetary Policy: Evidence from Pakistan

  • M. Idrees Khawaja

    ()

    (Pakistan Institute of Development Economics (PIDE), Quaid-e-Azam Campus, Islamabad, Pakistan.)

The study employs the Girton and Roper (1977) measure of exchange market pressure (defined as the sum of exchange rate depreciation and foreign reserves outflow), to examinethe interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and the interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increases in exchange market pressure (during 1991-98) was imprudent. The results suggest that fiscal needs/growth objectives might have dominated external account considerations during this period. Post 9/11 there is evidence of sterilized intervention in the forex market. The interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991-98). The finding implies that, for the interest rate to work as tool of monetary policy vis-a-vis exchange market pressure, a reasonable degree of capital mobility is called for.

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Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

Volume (Year): 12 (2007)
Issue (Month): 2 (Jul-Dec)
Pages: 83-114

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Handle: RePEc:lje:journl:v:12:y:2007:i:2:p:83-114
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Web page: http://www.lahoreschoolofeconomics.edu.pk/EconomicsJournal/LJEIntro.aspx

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  1. J. Joseph Beaulieu & Jeffrey A. Miron, 1992. "Seasonal Unit Roots in Aggregate U.S. Data," NBER Technical Working Papers 0126, National Bureau of Economic Research, Inc.
  2. Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
  3. Connolly, Michael & Dantas da Silveira, Jose, 1979. "Exchange Market Pressure in Postwar Brazil: An Application of the Girton-Roper Monetary Model," American Economic Review, American Economic Association, vol. 69(3), pages 448-54, June.
  4. Evan Tanner, 2002. "Exchange Market Pressure, Currency Crises, and Monetary Policy; Additional Evidence From Emerging Markets," IMF Working Papers 02/14, International Monetary Fund.
  5. Evan Tanner, 2001. "Exchange Market Pressure and Monetary Policy: Asia and Latin America in the 1990s," IMF Staff Papers, Palgrave Macmillan, vol. 47(3), pages 2.
  6. Parkin, Michael, 1976. " Comment on M. Mussa, "The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating."," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 249-54.
  7. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
  8. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-48.
  9. Gochoco-Bautista, Maria Socorro & Bautista, Carlos C., 2005. "Monetary policy and exchange market pressure: The case of the Philippines," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 153-168, March.
  10. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
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