Estimation of Medium Term Inflation Target for Pakistan

Fayyaz Hussain () and Muhammad Rehman ()
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Fayyaz Hussain: State Bank of Pakistan
Muhammad Rehman: State Bank of Pakistan

No 104, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: As a part of its strategic goal, State Bank of Pakistan (SBP) plans to switch to flexible inflation targeting regime. In this regard, the first and most important question is about setting appropriate medium term inflation target. This study aims to search for the medium term inflation target that is conducive for socioeconomic welfare. Seeking guidance from the international best practices, we have used broadly two procedures to search for appropriate inflation target and its band for Pakistan. First, we have analyzed the target setting practices of advanced and emerging inflation targeting economies. Second, we used a variety of technical methods. Results show that inflation level above 8 to 9 percent is harmful for the society. On the lower bound inflation below 4.0 percent is also undesirable. Keeping in mind these findings, inflation target range in the similar emerging economies, history of inflation volatility in Pakistan and importance of exchange rate, we recommend inflation target to be set at 5.5 percent with a band of +/- 1.5

JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2020-02
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