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Choice of Monetary Policy Regime: Should the SBP Adopt Inflation Targeting?

Author

Listed:
  • Moinuddin

    (State Bank of Pakistan)

Abstract

Monetary aggregate targeting is based on a stable and predictable relationship between inflation and monetary aggregate(s). However, structural changes both in the economy as well as in the financial sector, financial innovation and increasing application of technology have significantly weakened the relationship between inflation and money. The major finding of this paper is that money demand function is unstable in Pakistan, therefore monetary aggregate targeting is not suitable. Consequently, inflation targeting (IT) may be an option for the SBP; it has superior qualities of easy to understand target, flexibility, transparency and being more amenable to accountability. However, some prerequisites such as fiscal prudence, independence of central bank, legislative support, availability of an appropriate measure of inflation and improvement in technical skills of the staff are required before the adoption of IT. It is argued that since the SBP lacks many of these pre-requisites, it may adopt IT Lite as a viable option in the mean time.

Suggested Citation

  • Moinuddin, 2009. "Choice of Monetary Policy Regime: Should the SBP Adopt Inflation Targeting?," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 5, pages 1-30.
    • Handle: RePEc:sbp:journl:34
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    File URL: http://www.sbp.org.pk/research/bulletin/2009/vol5/ChoiceofMonetaryPolicyRegime.pdf
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    More about this item

    Keywords

    inflation targeting; money demand function; monetary policy regime;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • 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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