Monetary Policy Reaction Function in Open Economy Version: Empirical Evidence in Case of Pakistan

Sulaiman D. Mohammad, Adnan Hussain, Mohammad Ahsannudin, Shazia Kazmi and Irfan Lal ()

MPRA Paper from University Library of Munich, Germany

Abstract: Aftermath the globalization and financial liberalization the purpose of monetary policy deviates from economic growth to economic stabilization. Therefore monetary authority adjusts its policy rate in response to systematic changes in macroeconomic activities and business fluctuations. The rule which is followed to stable an economy at development path is called Taylor’s rule. This study empirically investigates monetary policy reaction function in case of Pakistan by applying Taylor’s rule (1993) nevertheless Johansan co integration test is employed for its open economy version. The results depicted that inflation does not play significant role due to the monetary policy as such in the frame work of Pakistan’s economy. Therefore inflation targeted monetary policy does not suggest for Pakistan. To analyze the stability of coefficient ROLLING WINDOW technique was employed as it is found that monetary authority adopted inflation targeted monetary policy after 2002 which was not suitable as this study has shown.

Keywords: Taylor’s rule; inflation gap; output gap; exchange rate gap (search for similar items in EconPapers)
JEL-codes: C10 E31 F31 (search for similar items in EconPapers)
Date: 2012-07-02
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