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What Does Pakistan Have to Join the Inflation Targeters’ Club—a Royal Flush or a Seven-Deuce Offsuit?

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  • Syed Kumail Abbas Rizvi

    () (Assistant Professor, Lahore School of Economics, Pakistan.)

  • Bushra Naqvi

    () (Assistant Professor, Suleman Dawood School of Business, Lahore University of Management Sciences, Pakistan.)

  • Sayyid Salman Rizavi

    () (Assistant Professor, Hailey College of Commerce, University of the Punjab, Pakistan.)

Abstract

The economic and institutional structure required to successfully adopt and implement an inflation targeting framework (ITF) is often lacking in emerging economies. This paper evaluates these structures both qualitatively and quantitatively for Pakistan’s economy.Although our comprehensive assessment finds that many of the core requirements remain unrealized, the literature and real-time experience argue that an ITF remains possible for emerging economies even in the absence of these conditions. We investigate whether—were the State Bank of Pakistan to adopt an ITF—there exists a stable and significant relationship between the policy rate (monetary tool) and inflation measure (objective). It is important to analyze this bivariate relationship, given the key role of the interest rate in mitigating deviations between actual and target inflation when working within an ITF. To illustrate this relationship, we use Granger Causality test, but our estimates fail to find any significant link between the interest rate and inflation. On the basis of our overall findings, we suggest that Pakistan, in the absence of most ofthe fundamental requirements of an ITF, is perhaps not yet ready for it.

Suggested Citation

  • Syed Kumail Abbas Rizvi & Bushra Naqvi & Sayyid Salman Rizavi, 2012. "What Does Pakistan Have to Join the Inflation Targeters’ Club—a Royal Flush or a Seven-Deuce Offsuit?," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(2), pages 35-62, July-Dec.
  • Handle: RePEc:lje:journl:v:17:y:2012:i:2:p:35-62
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    References listed on IDEAS

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    Keywords

    Inflation targeting; Pakistan; monetary policy;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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