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Monetary Conditions Index for Pakistan

Listed author(s):
  • Zulfiqar Hyder

    ()

    (State Bank of Pakistan)

  • Muhammad Mazhar Khan

    ()

    (State Bank of Pakistan)

The paper discusses how changes in interest rate and exchange rate, through Monetary Conditions Index (MCI), are used for assessing the overall monetary policy stance. The weights for construction of MCI are derived using the Johansen’s cointegration techniques. The constructed MCI indicates that Pakistan has eight tight and six soft periods of monetary stance during March 1991 to April 2006. Exchange rate movements and interest rate changes together determined MCI before September 2001. However, MCI moved largely with the changes in interest rate after the September 2001 events, as rupee appreciated due to phenomenal surge in remittances and the incomplete sterilization of forex flows led to unprecedented reduction in interest rates–thus soft monetary stance. MCI reflects tightening of monetary stance from January 2004 after the bottoming out of interest rates due to inflationary concerns.

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File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp11.pdf
File Function: First version, 2006
Download Restriction: no

Paper provided by State Bank of Pakistan, Research Department in its series SBP Working Paper Series with number 11.

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Length: 26 pages
Date of creation: May 2006
Handle: RePEc:sbp:wpaper:11
Contact details of provider: Postal:
CENTRAL DIRECTORATE, I.I. CHUNDRIGAR ROAD, KARACHI-74000

Web page: http://www.sbp.org.pk/repec/sbp/index.html
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  1. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
  2. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
  3. Charles Freedman, 1995. "The role of monetary conditions and the monetary conditions index in the conduct of policy [speech]," Bank of Canada Review, Bank of Canada, vol. 1995(Autumn), pages 53-59.
  4. Kim, Suk-Joong & Kortian, Tro & Sheen, Jeffrey, 2000. "Central bank intervention and exchange rate volatility -- Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 381-405, December.
  5. Eatzaz Ahmad & Saima Ahmed Ali, 1999. "Exchange Rate and Inflation Dynamics," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 38(3), pages 235-251.
  6. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, vol. 83(5), pages 1356-1369, December.
  7. 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.
  8. 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.
  9. Choudhri, Ehsan U. & Faruqee, Hamid & Hakura, Dalia S., 2005. "Explaining the exchange rate pass-through in different prices," Journal of International Economics, Elsevier, vol. 65(2), pages 349-374, March.
  10. Disyatat, Piti & Galati, Gabriele, 2007. "The effectiveness of foreign exchange intervention in emerging market countries: Evidence from the Czech koruna," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 383-402, April.
  11. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
  12. Zulfiqar Hyder & Sardar Shah, 2004. "Exchange Rate Pass-Through to Domestic Prices in Pakistan," SBP Working Paper Series 05, State Bank of Pakistan, Research Department.
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