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The Taylor Rule and the Macroeconomic Performance in Pakistan

  • Wasim Shahid Malik

    (Pakistan Institute of Development Economics, Islamabad.)

  • Ather Maqsood Ahmed

    (Central Board of Revenue, Islamabad.)

A widely agreed proposition in modern economics is that policy rules have greater advantage over discretion in improving economic performance. Simple monetary policy instrument rules are feasible options for developing countries lacking the pre-requisites for more sophisticated targeting rules. Notwithstanding the focus of modern literature on the issue, the State Bank of Pakistan (SBP) has never declared itself to be following any type of rule. Surprisingly, this topic has remained out of research focus (among the academia and the practitioners) in Pakistan. This is the first attempt to deal with a rule-based monetary policy strategy in the case of the SBP. We have estimated the Taylor rule and simulated the economy using this rule as a monetary policy strategy. Our results indicate that the SBP has not been following the Taylor rule. In fact, the actual policy can be taken as an extreme deviation from it. On the other hand, counterfactual simulation confirms that macroeconomic performance can be improved, in terms of stability in inflation and output, when a simple Taylor rule is adopted. In this regard the parameter values (especially the inflation target) in the rule must be set according to the conditions of the economy under consideration rather than by relying on the ones suggested by the Taylor rule.

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File URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-34.pdf
File Function: First Version, 2007
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Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2007:34.

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Length: 28 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:pid:wpaper:2007:34
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  1. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  2. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
  3. Wasim Shahid Malik, 2007. "Monetary Policy Objectives in Pakistan: An Empirical Investigation," PIDE-Working Papers 2007:35, Pakistan Institute of Development Economics.
  4. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
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