Exchange Market Pressure and Monetary Policy: Evidence from Pakistan
The study employs Girton and Roper (1977) measure of exchange market pressure—sum of exchange rate depreciation and foreign reserves outflow, to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increase in exchange market pressure (during 1991–98) is imprudent. The result suggests that fiscal needs/growth objective might have dominated the external account considerations during the span. Post 9/11 there is evidence of sterilised intervention in forex market. Interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991–98). The finding implies that for interest rate to work as tool of monetary policy vis-a-vis exchange market pressure a reasonable degree of capital mobility is called for.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: P.O.Box 1091, Islamabad-44000|
Web page: http://www.pide.org.pk
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- Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, vol. 67(4), pages 537-48, September.
- Evan Tanner, 2001.
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0126, National Bureau of Economic Research, Inc.
- Connolly, Michael & Dantas da Silveira, Jose, 1979. "Exchange Market Pressure in Postwar Brazil: An Application of the Girton-Roper Monetary Model," American Economic Review, American Economic Association, vol. 69(3), pages 448-54, June.
- Parkin, Michael, 1976. " Comment on M. Mussa, "The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating."," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 249-54.
- Gochoco-Bautista, Maria Socorro & Bautista, Carlos C., 2005. "Monetary policy and exchange market pressure: The case of the Philippines," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 153-168, March.
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"An Interest Rate Defence of a Fixed Exchange Rate?,"
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- Flood, Robert P. & Jeanne, Olivier, 2005. "An interest rate defense of a fixed exchange rate?," Journal of International Economics, Elsevier, vol. 66(2), pages 471-484, July.
- Olivier Jeanne & Robert P. Flood, 2000. "An Interest Rate Defense of a Fixed Exchange Rate?," IMF Working Papers 00/159, International Monetary Fund.
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