What Does Pakistan Have to Join Inflation Targeters Club, A Royal Flush or A Seven-Deuce Offsuit?

Naqvi, Bushra and Rizvi, Syed Kumail Abbas (2008): What Does Pakistan Have to Join Inflation Targeters Club, A Royal Flush or A Seven-Deuce Offsuit?

Abstract

The economic and institutional structure required for successful adoption and implementation of Inflation Targeting (IT) framework is often lacking in Emerging economies. In this paper, we evaluate these structures for the economy of Pakistan both qualitatively and quantitatively. Although our comprehensive assessment identifies non-realization of many core requirements but as literature and real time experience pointed out that IT can be a framework for emerging economies even in the absence of these conditions, we go further by investigating that if State Bank of Pakistan (SBP) decides to adopt IT, does there exist a stable and significant relationship between policy rate (monetary tool) and inflation measure (objective)? This bivariate relationship is important to be analyzed given the important role of interest rate in mitigating the deviations between actual and target inflation while working within the IT framework. To illustrate this relationship, we use Granger Causality test and our estimates fail to find any significant link between interest rate and inflation. On the basis of overall findings, this study suggests that Pakistan, due to the absence of most fundamental requirements of IT, is perhaps not ready for Inflation Targeting yet.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation Targeting, Pakistan, Monetary policy
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; 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

References

Akbari, A. and Rankaduwa, W. (2006), “Inflation Targeting in a Small Emerging Market Economy: The Case of Pakistan”, SBP – Research Bulletin Volume 2, Number 1, 2006

Angeriz, A. and Arestis, P. (2005b), “An Empirical Investigation of Inflation Targeting in Emerging Economies”, Working Paper, Cambridge Centre for Economic and Public Policy, University of Cambridge

Arnone, M., Laurens, B.J., Segalotto, J. and Sommer, M. (2007), “Central Bank Autonomy: Lessons from Global Trends”, Working Paper No. 07/88, International Monetary Fund, Washington, D.C.

Bernanke, B.S., Laubach, T., Mishkin, F.S. and Posen, A. (1999), “Inflation Targeting: Lessons from the International Experience”, Princeton University Press, Princeton

Bernanke, B.S. (2003), “A Perspective on Inflation Targeting”, Remarks at the Annual Washington Policy Conference of the National Association of Business Economists, 25 March, Washington DC

Chaudhry, M. and Choudhary, M. (2006), “Why the State Bank of Pakistan should not Adopt Inflation targeting”, SBP – Research Bulletin, Volume 2, Number 1, 2006

Crowe, C., Meade, E. E., (2008), “Central Bank Independence and Transparency: Evolution and Effectiveness”. European Journal of Political Economy, Forthcoming Data, http://www.imf.org/external/pubs/ft/wp/2008/data/wp08119.zip

Cukierman, A., Webb, S.B., Neyapti, B., (1992), “Measuring the Independence of Central Banks and Its Effect on Policy Outcomes”, World Bank Economic Review 6, 353-398

Debelle, G. (1997), “Inflation Targeting in Practice”, Working Papers Series, No. 97/35, International Monetary Fund, Washington, D.C.

Dincer, N. and Eichengreen, B. (2006), “Central Bank Transparency: Where, Why, and to What Effect?”

Fraga, A., Ilan, G. and André, M. (2003), “Inflation Targeting in emerging economies”, NBER Working Paper 10019

Friedman, B.M. (2004), Commentary on “Is Inflation Targeting Best-Practice Monetary Policy?” (J. Faust and D.W. Henderson), Federal Reserve Bank of St. Louis Review, 86(4), 145-149

Gonçalves, C. and Salles, J. (2006), “Inflation Targeting in Emerging Economies: What do the data say?” Journal of Development Economics 85 (2008) 312 – 318

IMF (2005), “Does Inflation Targeting Work in Emerging Markets?” IMF World Economic Outlook, September 2005-09-16, International Monetary Fund, Washington D.C

IMF (2006), “De Facto Classification of Exchange Rate Regimes and Monetary Frameworks”, available at: http://www.imf.org/external/np/mfd/er/index.asp

Jha R. (2004), “Inflation Targeting in India: Issues and Prospects”, Working Paper 2004

Khalid, A. (2006), “Is Inflation Targeting the Best Policy Choice for Emerging Economies? A Survey of Emerging Market Experiences and Lessons for Pakistan”, SBP – Research Bulletin Volume 2, Number 1, 2006

Khalid, A. (2005), “Economic Growth, Inflation, and Monetary Policy in Pakistan: Preliminary Empirical Estimates”, Pakistan Development Review, 44: 4 Part II (Winter 2005) pp. 961- 974

Khawar, H. (2008), “Managed Float or Price setting”, Dawn Internet Edition, available at http://www.dawn.com/2008/05/19/ebr9.htm

Malik, W. and Musleh-ud Din (2008), “Monetary Policy Transparency in Pakistan: An Independent Analysis”, PIDE Working Papers 2008: 44

Malik, W. (2007), “Monetary Policy Objectives in Pakistan: An empirical Investigation”, PIDE Working Papers 2007: 35

Masson, P. Savastano, M. and Sunil, S. (1998), “Can Inflation Targeting be a Framework for Monetary Policy in Developing Countries?” Finance and Development / March 1998

Mishkin, F.S. and Posen, A.S. (1997), “Inflation Targeting Lessons from Four Countries”, Federal Reserve Bank of New York Economic Policy Review, 3(1), 9-117

Mishkin, F.S. (2002), Commentary on “Does Inflation Targeting Matter?”, Federal Reserve Bank of St. Louis Review, 84(4), 149-153

Moinuddin (2007), “Choice of Monetary Policy Regime: Should SBP Adopt Inflation Targeting”, SBP Working Paper Series, No. 19, July 2007

Pétursson, T. (2004), “The Effects of Inflation Targeting on Macroeconomic Performance”, mimeo, Central Bank of Iceland, Reichvick, Iceland

Porter, N. and Yao, J.Y. (2005), “’Inflation Targeting Lite’ in Small Open Economies: The Case of Mauritius”, IMF Working Paper 05/172, International Monetary Fund, Washington, D.C.

Qayyum, A. (2002), “Monetary Conditions Index: A Composite Measure of Monetary Policy in Pakistan”, Munich Personal RePEc Archive

State Bank of Pakistan, (2008), “Monetary Policy Statement, January–June, 2008”, available at http://www.sbp.org.pk

Sikklos, P.L. (1999), “Inflation-Target Design: Changing Inflation Performance and Persistence in Industrial Countries”, Federal Reserve Bank of St. Louis Review, 81(1), 47-58

Taylor (1993), “Discretion versus Policy Rules in Practice”, Carnegie-Rochester Conference Series on Public Policy, 39, 199-214