This paper utilizes generalized method of moments and monthly data from 1982M1 to
2013M12 to check the interaction between net domestic assets and net foreign assets.
The objective is to check the extent by which the Central Bank neutralizes effects of
changes in foreign capital inflows on domestic monetary base and how capital inflows
respond to such efforts of monetary authorities in Pakistan. Results indicate that the
Central Bank partially sterilized the effects of foreign capital inflows. However, such
sterilization measures resulted equal and opposite changes in foreign assets which is
consistent with perfect asset substitutability. This finding has important implication that
monetary authorities’ in Pakistan are not independent in formulating an independent
monetary policy. The Central Bank’s efforts to maintain domestic monetary base
unchanged by changing net domestic assets results equal and opposite changes in its net
foreign assets.
Muhammad Akram Gilal, Ali Gul Khushik, Hakim Ali Mahesar. (2016) Capital Movements and Sterilization Policy in Pakistan: Evidence from Generalized Method of Moments, , Volume-10, Issue-2.
