Monetary Policy Stance: Comparison of Different Measures for Pakistan

Muhammad Nadeem Hanif (), Sajawal Khan () and Muhammad Rehman ()
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Muhammad Nadeem Hanif: State Bank of Pakistan
Muhammad Rehman: State Bank of Pakistan

No 73, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: This paper estimates monetary policy stance measures like Monetary Conditions Index (MCI), Financial Conditions Index (FCI), and Bernanke and Mihov Index (BMI) for Pakistan. The estimated monetary policy stance guides whether the policy is tight, neutral or loose relative to its objectives. And thus, it may help policy maker adjusting policy instrument(s) to guide the economy in desired direction. It also helps in knowing which monetary policy transmission channel is more effective along with the impact of various monetary policy measures upon the desired goals. Despite the fact that supply shocks are found to be dominant in Pakistan which gives little room to monetary policy to play an effective role as stabilizing tool, movements in exchange rate and monetary aggregates turned out to be more important than the interest rate in policy transmission mechanism. Being a small open economy facing persistent current account deficits, exchange rate consideration thus played major role in monetary policy transmission in Pakistan. State Bank of Pakistan had been targeting monetary aggregate until recently and just recently started active use of interest rate as policy instrument. It may take some time for interest rate channel to take lead. The comparison of different estimated measures shows that MCI performs better as measure of monetary policy stance (compared to FCI and BMI) in the case of Pakistan.

Keywords: Financial markets and macroeconomy; monetary policy (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2016-04
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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