Monetary Conditions Index for Pakistan

Zulfiqar Hyder () and Muhammad Mazhar Khan ()
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Muhammad Mazhar Khan: State Bank of Pakistan

No 11, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: 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.

Keywords: Monetary Conditions Index; Interest Rate Channel; Exchange Rate Channel. (search for similar items in EconPapers)
JEL-codes: C22 C52 E52 E58 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-05
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Monetary Conditions Index for Pakistan (2007)
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