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Why the State Bank of Pakistan should not Adopt Inflation Targeting

Author

Listed:
  • Muhammad Aslam Chaudhry

    () (University of the Punjab)

  • Munir A. S. Choudhary

    (University of the Punjab)

Abstract

This paper attempts to examine the determinants of inflation and output growth for Pakistan over the period of 1972–2004, using ARDL approach to cointegration. The results presented in this paper indicate that the growth rate of import prices is the most important determinant of inflation in Pakistan, both in the short run and long run, which is followed by growth rate of output. The effect of monetary policy on inflation is negligible and statistically insignificant at the conventional 5 percent level, both in the short and long run. Monetary policy has a very strong effect on output both in the short run and long run. The hypothesis that there exists a proportionate relationship between money growth and output growth rate cannot be rejected in the long run. Evidence presented in this paper suggests that Pakistan’s economy is operating at a very horizontal portion of the supply curve and the major cause of inflation is an increase in import prices, not in the mismanagement of monetary policies. Thus, monetary authorities in Pakistan should not switch to inflation targeting because any attempt to reduce inflation through monetary policies will push the economy into severe recession.

Suggested Citation

  • Muhammad Aslam Chaudhry & Munir A. S. Choudhary, 2006. "Why the State Bank of Pakistan should not Adopt Inflation Targeting," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 2, pages 195-209.
  • Handle: RePEc:sbp:journl:11
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    File URL: http://www.sbp.org.pk/research/bulletin/2006/Why_State_Bank_Not_Adopt_Inflation_Targeting.pdfFile-Format:Application/pdf
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    References listed on IDEAS

    as
    1. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(5), pages 799-810, December.
    2. David F. Hendry & Hans-Martin Krolzig, 2004. "We Ran One Regression," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(5), pages 799-810, December.
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    Cited by:

    1. Mahmood-ul-Hasan Khan, 2008. "Short Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, pages 1-30.
    2. Dasgupta, Dipak & Dubey, R.N. & Sathish, R, 2011. "Domestic Wheat Price Formation and Food Inflation in India," MPRA Paper 31564, University Library of Munich, Germany.
    3. Nicas Yabu & Nicholaus J. Kessy, 2015. "Appropriate Threshold Level of Inflation for Economic Growth: Evidence from the Three Founding EAC Countries," Applied Economics and Finance, Redfame publishing, pages 127-144.
    4. Khan, Safdar Ullah & Saqib, Omar Farooq, 2011. "Political instability and inflation in Pakistan," Journal of Asian Economics, Elsevier, pages 540-549.
    5. 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), pages 193-209.
    6. Magda Kandil & Hanan Morsy, 2011. "Determinants Of Inflation In Gcc," Middle East Development Journal (MEDJ), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 141-158.
    7. Khan, Abdul Aleem & Ahmed, Qazi Masood & Hyder, Kalim, 2007. "Determinants oF Recent Inflation in Pakistan," MPRA Paper 16254, University Library of Munich, Germany, revised 2007.
    8. Nazir, Sidra & Saeed, Saira & Muhammad, Atta, 2017. "Threshold Modeling for Inflation and GDP Growth," MPRA Paper 79649, University Library of Munich, Germany.
    9. Mohsin S. Khan, 2009. "The Design and Conduct of Monetary Policy: Lessons for Pakistan (The Quaid-i-Azam Lecture)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 48(4), pages 337-356.
    10. Adnan Haider & Qazi Masood Ahmed & Zohaib Jawed, 2014. "Determinants of Energy Inflation in Pakistan: An Empirical Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 53(4), pages 491-504.
    11. S. Adnan & H.A.S. BUKHARI & Safdar Ullah KHAN, 2008. "Does Volatility In Government Borrowing Leads To Higher Inflation? Evidence From Pakistan," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 187-202.
    12. Khan, Mahmood ul Hassan & Hanif, Muhammad Nadim, 2012. "Role of Demand and Supply Shocks in Driving Inflation: A Case Study of Pakistan," MPRA Paper 48884, University Library of Munich, Germany.
    13. Mahmood ul Hasan Khan, 2008. "Short-Run Effects of an Unanticipated Change in Monetary Policy: Interpreting Macroeconomic Dynamics in Pakistan," SBP Working Paper Series 22, State Bank of Pakistan, Research Department.
    14. Muhammad Sadiq Ansari, 2007. "An Empirical Investigation of Cost Efficiency in the Banking Sector of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, pages 209-231.
    15. Mehak Moazam & M. Ali Kemal, 2016. "Inflation in Pakistan: Money or Oil Prices," Working Papers id:11507, eSocialSciences.
    16. Hesham Alogeel & Maher Hasan, 2008. "Understanding the Inflationary Process in the GCC Region; The Case of Saudi Arabia and Kuwait," IMF Working Papers 08/193, International Monetary Fund.
    17. Bukhari, Syed Kalim Hyder & Abdul, Jalil & Rao, Nasir Hamid, 2011. "Detection and Forecasting of Islamic Calendar Effects in Time Series Data: Revisited," MPRA Paper 31124, University Library of Munich, Germany.

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