Abasyn Journal of Social Sciences – Vol (11), Issue (2), 2018

An Analysis of the State Bank of Pakistan Monetary Policy Reaction Function in an Open Economy Taylor Rule Framework

1Muhammad Tariq, 2Shahid Jan Kakakhel

1Abdul Wali Khan University Mardan
2Islamia College University Peshawar


 



Abstract
This paper presents an empirical study of the monetary policy of Pakistan during the period 1973 to 2015. For this purpose, a Taylor rule-based monetary policy reaction function of State Bank of Pakistan has  been analyzed. Specifically, it has been investigated, whether the State Bank of Pakistan using a Taylor rulebased monetary policy, targets only interest rate? Or it also targets real exchange rate by adopting an  open economy Taylor rule based policy. The study used Hodric Prescott Filter method for removing the long run trend from data and making it stationary. After that ordinary least squares method and Wald test has been used for the estimation of results. First results have been computed for the full sample period of the study during the period 1973-2015. After that, results has been estimated for the sub sample periods (i.e.  three exchange rate regimes periods) during 1973-1981, 1982-1999 and 2000-2015. The full sample period results showed a systematic reaction of the State Bank of Pakistan to exchange rate fluctuations.  However, the subsample analysis conditional on historical changes of the exchange rate regimes provides a different picture of the monetary policy management in Pakistan. A time-varying attention placed by SBP to inflation and output gaps fluctuations is uncovered by our subsample investigation.
Keywords: Taylor rule, Real exchange rate, Backward looking model, Fstatistic

Received

Received Revised

Accepted

Available Online


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