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Inflation Targeting in a Small Emerging Market Economy: The Case of Pakistan

Author

Listed:
  • Ather H. Akbari

    (Saint Mary’s University, Halifax, NS Canada)

  • Wimal Rankaduwa

    (University of Prince Edward Island, Charlottetown, PEI Canada)

Abstract

The success of inflation targeting monetary policy in established market economies has generated interest among monetary policy-makers in smaller emerging market economies to explore the adoption of the same, in order to overcome their current inflationary trends. In recent years, Pakistan has adopted several structural reforms that have enhanced the role of markets in its economy. Fiscal consolidation has also cleared the way for its central bank, the State Bank of Pakistan (SBP), to adopt independent monetary instruments to conduct its monetary policy. Steps towards greater liberalization of foreign exchange rates, greater accountability of commercial bank executives, and towards increased transparency of SBP’s operations are good reasons to explore the feasibility of a market-based monetary policy aimed at achieving its intermediate targets. The present study explores the feasibility of an inflation targeting monetary policy for Pakistan. Based on our econometric analysis and experiences of other emerging market countries, we raise a few issues that deserve policy-makers’ attention while considering the adoption of an inflation targeting monetary policy. These issues include: the weak impact of monetary policy on domestic prices, the impact of import prices on domestic prices, possible wide fluctuations in output growth resulting from frequent and abrupt adjustment of monetary growth rates when the inflation target is missed, and the lagged adjustment of domestic prices. Some light is also shed on the role of governance structure in determining the monetary and fiscal trends in the country.

Suggested Citation

  • Ather H. Akbari & Wimal Rankaduwa, 2006. "Inflation Targeting in a Small Emerging Market Economy: The Case of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 169-190.
    • Handle: RePEc:sbp:journl:10
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    Citations

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    Cited by:

    1. Jesus Felipe & J. S. L. McCombie & Kaukab Naqvi, 2010. "Is Pakistan's Growth Rate Balance-of-Payments Constrained? Policies and Implications for Development and Growth," Oxford Development Studies, Taylor & Francis Journals, vol. 38(4), pages 477-496.
    2. Sumera Arshad & Amajd Ali, 2016. "Trade-off between Inflation, Interest and Unemployment Rate of Pakistan: Revisited," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(4), pages 193-209, December.
    3. Khan, Safdar Ullah & Saqib, Omar Farooq, 2011. "Political instability and inflation in Pakistan," Journal of Asian Economics, Elsevier, vol. 22(6), pages 540-549.
    4. Khan, Rana Ejaz Ali & Gill, Abid Rashid, 2007. "Impact of Supply of Money on Food and General Price Indices: A Case of Pakistan," MPRA Paper 16293, University Library of Munich, Germany.
    5. Omer, Muhammad, 2009. "Stability of money demand function in Pakistan," MPRA Paper 35306, University Library of Munich, Germany.
    6. Mahmood, Haroon & Rehman, Kashif-ur-, 2013. "An Analysis of Macroeconomic State and Prospects of Pakistan during Recent Global Financial Turmoil," MPRA Paper 49447, University Library of Munich, Germany.
    7. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
    8. Sharif, Bushra & Qayyum, Abdul, 2018. "Estimating the Inflation-Output Gap Trade-Off with Triangle Model in Pakistan," MPRA Paper 91166, University Library of Munich, Germany.
    9. Zafar Hayat & Saher Masood, 2022. "Inflation Targeting Skepticism: Myth or Reality? A Way Forward for Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 1-27.

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