FINANCIAL STABILITY AND MONETARY POLICY REACTION FUNCTION FOR SOUTH ASIAN COUNTRIES: AN ECONOMETRIC APPROACH

Samia Nasreen and Sofia Anwar
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Samia Nasreen: Department of Economics, Government College Women University Faisalabad, Faisalabad, Punjab, Pakistan

The Singapore Economic Review (SER), 2023, vol. 68, issue 03, 1001-1030

Abstract: This study empirically investigates a monetary policy reaction function for South Asian economies by incorporating financial stability as an additional policy objective in the central bank’s loss function. Empirical results are estimated by applying auto-regressive distributed lag (ARDL) approach to cointegration and vector autoregressive (VAR) approach using time-series data of five South Asian countries, namely, Pakistan, India, Bangladesh, Nepal and Sri Lanka. Estimated results indicate that monetary policy significantly reacts to the level of financial stability in all countries. The result further suggests that central banks would tighten monetary policy if output gap widens and exchange rate depreciate. In addition, central banks of Pakistan and India do not respond significantly to inflation gap.

Keywords: Financial stability; AFSI; monetary policy; Taylor rule; South Asia (search for similar items in EconPapers)
JEL-codes: E44 E58 G12 G13 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1142/S0217590819500395

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