The Reserve Equation and The Analytics of Pakistan's Monetary Policy
This paper deals with the computation and analysis of some fundamental reserve aggregates and associated monetary statistics which impart important information regarding the design and conduct of monetary policy at the State Bank of Pakistan. Specifically, we compute the data series for borrowed, unborrowed, free and drainable reserves using balance sheet data published by the State Bank of Pakistan for the period 1985-2009. Results show that Pakistan’s monetary policy revolves around managing the exchange rate while using the t-bill rate as the key policy instrument. However, the value of the t-bill rate is both incorrectly and sub-optimally related to macroeconomic fundamentals rendering monetary policy time inconsistent. This hinges on the finding that since 2000-01, State Bank of Pakistan is targeting net free reserves of the banking system at 4% of total private deposits. Among other observations, we find that the scope of open market operations as a tool of monetary policy remains but limited and that this limited role of open market defenses derives from an indiscreet concern of the central bank to sterilize its own foreign exchange reserves. Furthermore, the growth rate of unborrowed plus drainable reserves bears a strong negative correlation with the annual average rate of inflation, which, on account of the former being consistently negative since 2005, implies that the government and the State Bank of Pakistan both have absolutely no concern for controlling inflation.
|Date of creation:||Nov 2010|
|Date of revision:||Apr 2011|
|Publication status:||Published in The Lahore Journal of Economics 1.16(2011): pp. 111-142|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Abbas Mirakhor & Iqbal Mehdi Zaidi, 2004.
"Foreign Currency Deposits and International Liquidity Shortages in Pakistan,"
IMF Working Papers
04/167, International Monetary Fund.
- Abbas Mirakhor & Iqbal Zaidi, 2006. "Foreign Currency Deposits and International Liquidity Shortages in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(1), pages 49-85.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997.
"Monetary policy rules and macroeconomic stability: Evidence and some theory,"
Economics Working Papers
350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
- Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
- Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
- Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
- Gordon, David B & Leeper, Eric M, 1994.
"The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification,"
Journal of Political Economy,
University of Chicago Press, vol. 102(6), pages 1228-47, December.
- David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 93-5, Federal Reserve Bank of Atlanta.
- David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
- Hassan, Rubina & Shahzad, Mirza Muhammad, 2011.
"A macroeconometric framework for monetary policy evaluation: A case study of Pakistan,"
Elsevier, vol. 28(1-2), pages 118-137, January.
- Hassan, Rubina & Shahzad, Mirza Muhammad, 2011. "A macroeconometric framework for monetary policy evaluation: A case study of Pakistan," Economic Modelling, Elsevier, vol. 28(1), pages 118-137.
- Carlo A. Favero, .
"Macroeconomic stability and the preferences of the Fed. A formal analysis, 1961-98,"
200, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Favero, Carlo A & Rovelli, Riccardo, 2003. " Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 545-56, August.
- Bindseil, Ulrich, 2004. "The operational target of monetary policy and the rise and fall of reserve position doctrine," Working Paper Series 0372, European Central Bank.
- Peter Clark & Sung Kwack, 1976. "Asset markets and interest rate determination in the multi-country model," International Finance Discussion Papers 94, Board of Governors of the Federal Reserve System (U.S.).
- Michael Dooley & Peter Garber, 2005. "Is It 1958 or 1968? Three Notes on the Longevity of the Revived Bretton Woods System," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 147-210.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:32149. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.