Monetary Policy Objectives in Pakistan: An Empirical Investigation

Wasim Malik ()

No 2007:35, PIDE-Working Papers from Pakistan Institute of Development Economics

Abstract: The Taylor rule (1993) focuses only on two objectives: output and inflation. In practice, the central bank’s loss function (especially in developing countries) contains objectives other than these two, like the interest rate smoothing, exchange rate stabilisation, etc. In this study, the monetary policy reaction function has been estimated, including five objectives for monetary policy as well as controlling for the effect of three other factors. Whereas the results confirm the counter-cyclical response of monetary policy to the factors in the loss function, the response of interest rate to changes in the foreign exchange reserves and the government borrowing has been negative. Variance decomposition shows that most of the variation in the interest rate is explained by its own lagged values. Other variables, in explaining variation in the interest rate, can be ranked as inflation, government borrowing, exchange rate, output gap, trade deficit, and, finally, the foreign exchange reserves.

Keywords: Monetary Policy Objectives; Variance Decomposition; Call Money Rate (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Monetary Policy Objectives in Pakistan: An Empirical Investigation (2007)
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