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.
Muhammad Tariq, Shahid Jan Kakakhel. (2018) An Analysis of the State Bank of Pakistan Monetary Policy Reaction Function in an Open Economy Taylor Rule Framework, Abasyn Journal of Social Sciences, Volume-11, Issue-2.
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