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Measures of Monetary Policy Stance : The Case of Pakistan

  • Sajawal Khan

    (PIDE)

  • Abdul Qayyum

In this paper we construct two measures of the monetary policy stance. The stance of monetary policy, regarded as a quantitative measure of whether Te policy is too tight, neutral, or too loose relative to objectives of stable prices and output growth, is useful and important for at least two reasons. First, it helps the authority (central bank) to determine the course of monetary policy needed to keep the objective (goals) within the target range. Secondly, a quantitative measure of the stance is important for an empirical study of the transmission of monetary policy actions through the economy. Measuring the stance of the monetary policy free from any criticism, however, is not an easy task. As pointed out by Gecchetti (1994), there seems to be no way to measure monetary actions that does not raise serious objections. Our results show that an individual coefficient Monetary Condition Index (MCI) performs better than both the summarised MCI coefficient and the Overall measure proposed by Bernanke and Mihov (1998). The results show that in the 21-year period from 1984 to 2004, the demand shocks have dominated for about eight years. The MCI (IS-Individual coefficient) can explain six of them. However, it indicates the negative demand shock in two years as neutral. The other two measures, however, fail to capture demand shocks most of the time. This analysis suggests that the MCI (IS-Individual coefficient) plays an important role in determining output and inflation when the economy is not dominated by supply shocks. The results also show that supply shocks are dominant in the case of Pakistan. Furthermore, the exchange rate channel is more important than the interest rate channel.

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Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22201.

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Date of creation: Jan 2007
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Handle: RePEc:eab:macroe:22201
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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  1. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  2. Mehtap Kesriyeli & I.Ilhan Kocaker, 1999. "Monetary Conditions Index : A Monetary Policy Indicator For Turkey," Discussion Papers 9908, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Joseph Beaulieu, J. & Miron, Jeffrey A., 1993. "Seasonal unit roots in aggregate U.S. data," Journal of Econometrics, Elsevier, vol. 55(1-2), pages 305-328.
  4. Goodhart, Charles & Boris Hofmann, 2002. "Asset Prices and the Conduct of Monetary Policy," Royal Economic Society Annual Conference 2002 88, Royal Economic Society.
  5. Fung, Ben Siu-cheong & Kasumovich, Marcel, 1998. "Monetary shocks in the G-6 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 42(3), pages 575-592, October.
  6. Eric M. Leeper, 1993. "Has the Romers' narrative approach identified monetary policy shocks," Working Paper 93-1, Federal Reserve Bank of Atlanta.
  7. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  8. Eichenbaum, Martin, 1992. "'Interpreting the macroeconomic time series facts: The effects of monetary policy' : by Christopher Sims," European Economic Review, Elsevier, vol. 36(5), pages 1001-1011, June.
  9. Norrbin, Stefan, 2001. "What Have We Learned from Empirical Tests of the Monetary Transmission Effect," Working Paper Series 121, Sveriges Riksbank (Central Bank of Sweden).
  10. Abdul Qayyum, 2002. "Monetary Conditions Index: A Composite Measure of Monetary Policy in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 41(4), pages 551-566.
  11. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  12. Ben S.C. Fung & Marcel Kasumovich, 1997. "Monetary Shocks in the G-6 Countries: Is There a Puzzle?," Working Papers 97-7, Bank of Canada.
  13. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 641-657, December.
  14. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
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