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The relevance and relative robustness of sources of inflation bias in Pakistan

Zafar Hayat, Faruk Balli () and Muhammad Rehman

Economic Modelling, 2017, vol. 63, issue C, 283-303

Abstract: We empirically examine the relevance and relative robustness of stabilization and non-stabilization sources of inflation bias for the typical discretionary monetary policy strategy of Pakistan. First, the stabilization and non-stabilization sources of inflation bias are identified, and their proxy variables are constructed. Second, a robustness evaluation strategy is developed based on bivariate and multivariate analysis of cointegrating relationships among inflation bias indicators and potential sources thereof to determine their long-term relevance and relative robustness or fragility. The stabilization sources of inflation bias such as exploitation of the inflation output trade-off for growth stimulation and the central bank’s preference for growth stabilization are the most relevant and relatively robust sources of inflation bias vis-à-vis the non-stabilization sources. Among the non-stabilization sources, only openness is partially relevant but is fragile.

Keywords: E31; E52; E58; Stabilization and non-stabilization sources of inflation bias; Relative robustness, Pakistan (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecmode:v:63:y:2017:i:c:p:283-303