Exchange Market Pressure and Monetary Policy: Evidence from Pakistan

Muhammad Khawaja

No 2007:31, PIDE-Working Papers from Pakistan Institute of Development Economics

Abstract: The study employs Girton and Roper (1977) measure of exchange market pressure—sum of exchange rate depreciation and foreign reserves outflow, to examine the interaction between exchange market pressure and monetary variables, viz. domestic credit (Reserve Money) and interest rate. Evidence from impulse response functions suggests that domestic credit has remained the dominant tool of monetary policy for managing exchange market pressure. The increase in domestic credit upon increase in exchange market pressure (during 1991–98) is imprudent. The result suggests that fiscal needs/growth objective might have dominated the external account considerations during the span. Post 9/11 there is evidence of sterilised intervention in forex market. Interest rate has also weakly served as the tool of monetary policy during the hay days of foreign currency deposits (1991–98). The finding implies that for interest rate to work as tool of monetary policy vis-a-vis exchange market pressure a reasonable degree of capital mobility is called for.

Keywords: Monetary Policy; Foreign Exchange (search for similar items in EconPapers)
JEL-codes: E52 F31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2007
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-31.pdf First Version, 2007 (application/pdf)

Related works:
Journal Article: Exchange Market Pressure and Monetary Policy: Evidence from Pakistan (2007)
Working Paper: Exchange Market Pressure and Monetary Policy: Evidence from Pakistan (1970)
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Persistent link: https://EconPapers.repec.org/RePEc:pid:wpaper:2007:31

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