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

Asian Social Science, Vol. 8, No. 8, July 2012

7 Pages Posted: 2 Aug 2012

See all articles by Sulaiman D. Muhammad

Sulaiman D. Muhammad

Federal Urdu University of Arts Science & Technology

Adnan Hussain

Benazir Bhutto Shaheed University, Lyari, Karachi; University of Karachi - Applied Economics Research Centre

Muhammad Ahsanuddin

affiliation not provided to SSRN

Shazia Kazmi

Federal Urdu University of Arts, Science & Technology; University of Karachi

Irfan Lal

Institute of Business Management (IoBM); University of Karachi - Applied Economics Research Centre; Institute of Business Management

Date Written: July 1, 2012

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 monthly data from the period of January 2003 to December 2008 has been collected for the analysis. It is found that the coefficient of output gap and exchange rate gap are significant while coefficient of inflation gap is insignificant. 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

Suggested Citation

Muhammad, Sulaiman D. and Hussain, Adnan and Ahsanuddin, Muhammad and Kazmi, Shazia and Lal, Irfan, Monetary Policy Reaction Function in Open Economy Version: Empirical Evidence in Case of Pakistan (July 1, 2012). Asian Social Science, Vol. 8, No. 8, July 2012, Available at SSRN: https://ssrn.com/abstract=2122308

Sulaiman D. Muhammad (Contact Author)

Federal Urdu University of Arts Science & Technology ( email )

Sector G-7/1, Main University Road
Gulshan-e-Iqbal
Karachi, Sindh 744000
Pakistan

Adnan Hussain

Benazir Bhutto Shaheed University, Lyari, Karachi ( email )

Faqir Mohammad Dura Khan Road,
Near cheel chowk
Karachi, Sindh 75500
Pakistan

HOME PAGE: http://www.bbsul.edu.pk

University of Karachi - Applied Economics Research Centre ( email )

Mail University Road
Karachi University
Karachi, SC Sind 75270
Pakistan

Muhammad Ahsanuddin

affiliation not provided to SSRN

Shazia Kazmi

Federal Urdu University of Arts, Science & Technology ( email )

Sector G-7/1, Main University Road
Gulshan-e-Iqbal
Karachi, Sindh 744000
Pakistan

University of Karachi ( email )

PA
00923002396117 (Phone)

Irfan Lal

Institute of Business Management (IoBM) ( email )

Plot # 84
Korangi Creek
Karachi, Sindh 75190
Pakistan

University of Karachi - Applied Economics Research Centre ( email )

Main University Road
Karachi University
Karachi, SC Sindh 75270
Pakistan
00923212348843 (Phone)

Institute of Business Management ( email )

D-93040 Regensburg
Germany

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