Hassan, Rubina and Mirza, M. Shahzad (2010): The Reserve Equation and The Analytics of Pakistan's Monetary Policy. Published in: The Lahore Journal of Economics , Vol. 16, No. 1 (June 2011): pp. 111-142.
Download (588Kb) | Preview
This paper deals with the computation and analysis of some fundamental reserve aggregates and associated monetary statistics which impart important information regarding the design and conduct of monetary policy at the State Bank of Pakistan. Specifically, we compute the data series for borrowed, unborrowed, free and drainable reserves using balance sheet data published by the State Bank of Pakistan for the period 1985-2009. Results show that Pakistan’s monetary policy revolves around managing the exchange rate while using the t-bill rate as the key policy instrument. However, the value of the t-bill rate is both incorrectly and sub-optimally related to macroeconomic fundamentals rendering monetary policy time inconsistent. This hinges on the finding that since 2000-01, State Bank of Pakistan is targeting net free reserves of the banking system at 4% of total private deposits. Among other observations, we find that the scope of open market operations as a tool of monetary policy remains but limited and that this limited role of open market defenses derives from an indiscreet concern of the central bank to sterilize its own foreign exchange reserves. Furthermore, the growth rate of unborrowed plus drainable reserves bears a strong negative correlation with the annual average rate of inflation, which, on account of the former being consistently negative since 2005, implies that the government and the State Bank of Pakistan both have absolutely no concern for controlling inflation.
|Item Type:||MPRA Paper|
|Original Title:||The Reserve Equation and The Analytics of Pakistan's Monetary Policy|
|Keywords:||Measurement of Money Supply; Analysis of Monetary Policy; Central Banks and Their Policies; Taylor Rule; Operational Targets of Monetary Policy.|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply; Credit; Money Multipliers
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Rubina Hassan|
|Date Deposited:||11. Jul 2011 11:56|
|Last Modified:||12. Feb 2013 10:20|
1. Bernanke, B. S., (2004), “Inflation Targeting”, Panel Discussion, Federal Reserve Bank of St. Louis Review, July/August 2004.
2. Bindseil, U. and F. Würtz, (2007), “Open Market Operations: Their Role and Specification Today”, in Open Market Operations and Financial Markets, edited by David G. Mayes and Jan Toporowski (2007), Routledge, Taylor and Francis Group, New York.
3. Bindseil, U., (2004), “The Operational Target of Monetary Policy and the Rise and Fall of Reserve Position Doctrine”, European Central Bank Working Paper Series, No. 372, June 2004.
4. Branson, William H., (1989), “Macroeconomic Theory & Policy”, 3rd Edition, Harper & Row, 1989.
5. Brunner, Karl and Allan H. Meltzer, (1964) “The Federal Reserve’s Attachment to the Free Reserve Concept” House Committee on Banking and Currency, 1964, Washington D.C., Reprinted in Monetary Economics, ed. Karl Brunner and A. H. Meltzer. London, Blackwell, 1989.
6. Clarida, R., J. Gali and M. Gertler, (2000), “Monetary policy rules and macroeconomic stability: Evidence and some theory”, The Quarterly Journal of Economics, 115 (1), 147-180.
7. Clark, Peter and S. Kwack, (1976), “Asset markets and interest rate determination in the multi-country model”, Federal Reserve Board of Governors, International Finance Discussion Papers, No. 94, 1976.
8. Dooley, Michael and Peter Garber, (2005), “Is it 1958 or 1968? Three Notes on the Longevity of the Revived Bretton Woods System”, Brookings Papers on Economic Activity, 1(2005), 147 – 209.
9. Ernhagen, T., M. Vesterlund and S. Viotti, (2002), “How much Equity Does a Central Bank Need”, Sveriges Riksbank Economic Review, (2), 2002, 5-17.
10. Favero, C. A. and R. Rovelli, (2001), “Macroeconomic Stability and the Performance of the Fed: A Formal Analysis 1961-98”, IGIER Universita Bocconi Working Paper. 17
11. Federal Reserve Bank (2002), “Federal Reserve Balance Sheet and Reserve Equation”, in “The Federal Reserve System: Purposes and Functions”, Board of Governors of the Federal Reserve, 2002.
12. Gavin, W. T., (2007), “Comments on Open Market Operations: Their Role and Specification Today”, in Open Market Operations and Financial Markets, edited by David G. Mayes and Jan Toporowski (2007), Routledge, Taylor and Francis Group, New York.
13. Gordon, David B. and Eric M. Leeper (1997), “The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification”, The Journal of Political Economy, 102(6), Dec 1994, 1228-1247.
14. Guttentag, J. M., (1966), “The Strategy of Open Market Operations”, Quarterly Journal of Economics, 80 (1), 1-30.
15. Hassan, R. and M. M. Shahzad, (2010), “A Macroeconometric Framework for Monetary Policy Evaluation: A Case Study of Pakistan”, Economic Modelling, 2010. doi:10.1016/j.econmod.2010.09.018.
16. Hassan, R. and M. M. Shahzad, (2010), “An Essential Correction in the Measurement of Currency in Circulation and Reserve Money”, submitted for publication to journal of Social Sciences, University of Karachi, 2010.
17. International Monetary Fund, (2005), “Monetary and Financial Statistics Manual”, International Monetary Fund, Chapter 4, p2.
18. Jordan, Jerry L., (1969), “Elements of Money Stock Determination”, Federal Reserve Bank of St. Louis Review, Federal Reserve Bank of St. Louis, Illinois.
19. Knoester, Anthony, (1979), “On Monetary and Fiscal Policy in an Open Economy”, De Economist, 127(1) March 1979, 105-142.
20. Malik, Waseem S. and Athar M. Ahmad, (2007), “The Taylor Rule and Macroeconomic Performance in Paksitan”, PIDE Working Papers Series, No. 34, 2007, http://www.pide.org.pk.
21. Mayes, David G. and Jan Toporowski (2007), Open Market Operations and Financial Markets, (edited), Routledge, Taylor and Francis Group, New York, 2007.
22. McKinnon, Ronald I., (1969), “Private and Official International Money: The Case for the Dollar”, Essays in International Finance, No. 74, Princeton University.
23. Meigs, A. James (1962), “Free Reserves and the Money Supply”, University of Chicago Press, 1962.
24. Mirakhor, Abbas and Iqbal Zaidi, (2004), “Foreign Currency Deposits and International Liquidity Shortages in Pakistan,” IMF Working Paper No. 04/167, September 2004, Washington, International Monetary Fund.
25. Mishkin, Frederic S., (2006), “The Economics of Money, Banking, and Financial Markets”, 8th Edition, Addison-Wesley, 2006.
26. Poole, William H., (1968), “Commercial Bank Reserve Management in a Stochastic Model: Implications for Monetary Policy,” Journal of Finance 23 (December 1968), 769-791.
27. Rudebusch, G. D. and L. E. Svensson, (1998), “Policy Rules for Inflation Targeting”, Paper Presented at NBER Conference on Monetary Policy Rules, February 1998.
28. State Bank of Pakistan, (2002), “Monetary Survey Manual”, Research Department, State Bank of Pakistan, Karachi.
29. State Bank of Pakistan, (2005), “Monetary Survey Manual (Revised)”, Research Department, State Bank of Pakistan, Karachi.
30. State Bank of Pakistan, (2009a), “Annual Report 2008-2009: Volume I”, Research Department, State Bank of Pakistan, Karachi.
31. State Bank of Pakistan, (2009b), “Monetary Policy Statement July – September 2009”, http://www.sbp.org.pk/m_policy/MPD-24-Nov-09(English).pdf, State Bank of Pakistan, 2009.
32. Taylor, J. B. (1998), “The Explanatory Power of Monetary Policy Rules”, NBER Working Paper Series, Working Paper No. 13685, http://www.nber.org/papers/w13685.
33. Taylor, J. B., (1993), “Discretion versus Policy Rules in Practice” Carnegie-Rochester Conference Series on Public Policy 39, pp. 195–214.
34. Teigen, Ronald, L., (1978), “Readings in Money, National Income and Stabilization Policy”, 4th Edition, Richard D. Irwin Inc., Illinois, 1978.
35. Toporowski, Jan, (2006), “Open market operations: beyond The New Consensus”, Bank of Finland Research Discussion Papers, 14:2006.