The Conduct of Monetary Policy in Pakistan
Journal Title: Pakistan Journal of Economic Studies - Year 2022, Vol 5, Issue 1
Abstract
The conduct of monetary policy is not a frictionless combination of monetary operations as in the case of Keynesian demand for liquidity, nor as mechanical as under the New Keynesian Taylor Rule. Ignoring the issue of output gap and feedback from monetary aggregates can produce explosive results for targeting inflation. The issue of inflation is beyond the simple Taylor principle. Our results show a significant relationship between inflation and interest rate. The money supply turned out to be insignificant. There is significant evidence of the output gap in Pakistan and our results from Taylor's rule show that the State Bank of Pakistan preferred cyclical over an aggressive policy. There is no evidence of using the active interest rate rule to form future expectations. Using a combination of monetary aggregates and output gaps to control inflation is not insignificant either. In the long run, inflation converges to a steady state, but the conduct of the monetary policy calls for interest rate adjustment.
Authors and Affiliations
Nadia Tahir
Keywords
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