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Taylor Rule and the Macroeconomic Performance in Pakistan

Author

Listed:
  • Wasim Shahid Malik

    (Quaid-e-Azam University, Islamabad.)

  • Ather Maqsood Ahmed

    (NUST Business School, Rawalpindi.)

Abstract

A near-consensus position in modern macroeconomics is that policy rules have greater advantage over discretion in improving economic performance. For developing countries in particular, simple instrument rules appear to be feasible options as prerequisites since more sophisticated targeting rules are generally lacking. Using Pakistan’s data, this study has attempted to estimate the Taylor rule and use it as monetary policy strategy to simulate the economy. Our results indicate that the State Bank of Pakistan (SBP) has not been following the Taylor rule. In fact, the actual policy has been an extreme deviation from it. On the other hand, counterfactual simulation confirms that macroeconomic performance could have been better in terms of stability of inflation and output, had the Taylor rule been adopted as monetary policy strategy. The study also establishes that further gains are possible if the parameter values of the rule are slightly modified.

Suggested Citation

  • Wasim Shahid Malik & Ather Maqsood Ahmed, 2010. "Taylor Rule and the Macroeconomic Performance in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(1), pages 37-56.
  • Handle: RePEc:pid:journl:v:49:y:2010:i:1:p:37-56
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    File URL: http://www.pide.org.pk/pdf/PDR/2010/Volume1/37-56.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Adnan Haider Bukhari & Safdar Ullah Khan, 2008. "A Small Open Economy DSGE Model for Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(4), pages 963-1008.
    2. Ather Maqsood Ahmed & Wasim Shahid Malik, 2011. "The Economics of Inflation, Issues in the Design of Monetary Policy Rule, and Monetary Policy Reaction Function in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 213-232, September.
    3. Nadia Tahir, 2013. "Forward-Looking and Backward-Looking Taylor Rules: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 121-145, July-Dec.
    4. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2008. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," MPRA Paper 19488, University Library of Munich, Germany.
    5. Syed Kumail Abbas Naqvi & Bushra Naqvi, 2010. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 1-33, Jul-Dec.
    6. repec:pid:journl:v:55:y:2016:i:3:p:161-190 is not listed on IDEAS
    7. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2009. "Inflation Volatility: An Asian Perspective," MPRA Paper 19489, University Library of Munich, Germany.
    8. Ahmed, Waqas & Rehman, Muhammad & Malik, Jahanzeb, 2013. "Quarterly Bayesian DSGE Model of Pakistan Economy with Informality," MPRA Paper 53168, University Library of Munich, Germany.
    9. Nadia Saleem, 2010. "Adopting Inflation Targeting in Pakistan: An Empirical Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 51-76, Jul-Dec.
    10. Hassan, Rubina & Shahzad, Mirza Muhammad, 2011. "A macroeconometric framework for monetary policy evaluation: A case study of Pakistan," Economic Modelling, Elsevier, vol. 28(1-2), pages 118-137, January.
    11. Wasim Shahid Malik & Musleh-ud Din, 2008. "Monetary Policy Transparency in Pakistan: An Independent Analysis," PIDE-Working Papers 2008:44, Pakistan Institute of Development Economics.
    12. Inayat Ullah Mangla, 2011. "Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 30-70, September.
    13. Aleem, Abdul & Lahiani, Amine, 2011. "Monetary policy rules for a developing country: Evidence from Pakistan," Journal of Asian Economics, Elsevier, vol. 22(6), pages 483-494.

    More about this item

    Keywords

    Taylor Rule; Macroeconomic Performance; Counterfactual Simulation;

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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