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Does Pakistan Need To Adopt Inflation Targeting? Some Questions
01 Jan 2009-Vol. 5, pp 113-162
TL;DR: In this article, the authors discuss the theoretical foundations of the standard IT model and argue that although most likely Pakistan meets the basic technical requirements to implement some version of it, the State Bank of Pakistan should take into consideration a number of issues before it makes a final decision whether to shift to IT or not.
Abstract: In this paper I consider the broader implications for Pakistan of a shift from the current monetary regime into inflation targeting (IT). To this purpose, I discuss the theoretical foundations of the standard IT model and argue that although most likely Pakistan meets the basic technical requirements to implement some version of it, the State Bank of Pakistan should take into consideration a number of issues before it makes a final decision whether to shift to IT or not. For example, I show that there is no overwhelming empirical evidence that short-term interest rates are inversely related to inflation. Finally, I argue that there are other options available to Pakistan’s central bank such as to target full employment subject to an inflation constraint. “Monetary policy cannot be formulated and implemented in isolation of government policies no matter how independent a central bank is whether of an advanced or a developing country”
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TL;DR: In this article, a post-Keynesian alternative to the Taylor Rule with exogenous interest rates has been proposed, which is more consistent than the Taylor rule with Keynes's General Theory.
Abstract: This paper outlines the fundamental arguments of the New Consensus, critiques it from a Post-Keynesian perspective, and offers a Post-Keynesian alternative to the Taylor Rule. While Post-Keynesian economics provides a theory of endogenous money with exogenous interest rates, it has no clear description of a central bank reaction function. We attempt to remedy this oversight by identifying some of the difficulties attached to developing a Post-Keynesian reaction function, and suggesting an approach to the setting of interest rates that is more consistent than the Taylor Rule with Keynes's General Theory. (This abstract was borrowed from another version of this item.)
28 citations
Posted Content•
01 Jan 2010
TL;DR: In this article, the authors investigated the stability of the velocity of money in Pakistan and found that base and broad money velocities are independent of the interest rate fluctuations, and the velocity of all the three monetary aggregates (i.e., M0, M1, and M2) have stable relationship with their determinants.
Abstract: This paper is an attempt to contribute to the ongoing debate: should central bank of Pakistan adopt the inflation targeting or continue with the monetary targeting as a monetary policy strategy? A pre-requisite for monetary targeting strategy is a stable money demand function, which in turn requires stability in velocity. Instability in velocity on the other hand is believed to stem from the volatility of the interest rate. The paper estimates velocity of money functions and explores their stability in Pakistan. The results show that base and broad money velocities are independent of the interest rate fluctuations. It is also found that velocities of all the three monetary aggregates (i.e., M0, M1, and M2) have stable relationship with their determinants. These findings support the use of monetary aggregates as nominal anchor.
14 citations
Posted Content•
01 Jan 2009
TL;DR: In this article, the authors explore the stability of velocity of money in Pakistan and show that the base and broad money velocities are independent of the interest rate fluctuations, and validate use of monetary aggregates as nominal anchor.
Abstract: This paper is an attempt to contribute to the ongoing debate: should central bank of Pakistan adopt inflation targeting or continue with the monetary targeting as a monetary policy strategy? A pre-requisite for monetary targeting strategy is a stable money demand function, which in turn requires stability in velocity. Instability in velocity on the other hand is believed to stem from the volatility of the interest rate. The paper explores the stability of velocity of money in Pakistan. The results show that the base and broad money velocities are independent of the interest rate fluctuations. It is also found that all the three velocities (with respect to M0, M1, and M2) have stable relationship with their determinants. These findings validate use of monetary aggregates as nominal anchor.
13 citations
Dissertation•
01 Jan 2016
TL;DR: In this article, the authors investigated the effect of the ITF policy transition on the exchange rate volatility in sub-Saharan African economies and determined causality among the variables of the monetary theory of exchange rate determination.
Abstract: Exchange rate volatility has affected not only sub-Saharan African economies but the volume of international transactions in general. It directly affects the nations’ profitability of tradable commodities, balance of payment, terms of trade and
investment decisions. Despite the measures taken by the monetary authorities to ensure macroeconomic stability, exchange rate remains volatile. This study, therefore pursues the following objectives. First, it investigates the effectiveness of the inflation targeting framework (ITF) as a hedging strategy for exchange rate volatility. Second,
examines whether the monetary policy of ITF has performed the role of the nominal anchor in the economies. Third, examines the influence of exchange rate regime switching on exchange rate volatility and finally, determines causality among the variables of the monetary theory of exchange rate determination. In achieving the results of the objectives, the study employed a battery of econometric procedures namely, threshold generalised autoregressive conditional heteroscedasticity (TGARCH) model, generalised method of moments (GMM) estimators, time-varying
Markov-switching transition probability ARCH model and asymmetric/Toda-Yamamoto dynamic causality with leverage bootstrapping. The results of the first
objective indicate that the menace of exchange rate volatility reduces when the IT policy was adopted in Ghana and South Africa. However, the ITF policy transition increases the volatility of exchange rate. Secondly, the findings on the baseline and
augmented Taylor rule models reveal that ITF become a nominal anchor in the economies immediately after the adoption of the policy, although the hypothetical response of interest rate to inflation deviation and output gap is greater in South Africa
compared to Ghana. Thirdly, the results of the time-varying Markov-switching models indicate that the exchange rates of the countries are characterised by decline in the downward regime except for Nigeria which shows high decline in the upward regime. Finally, the estimates of the asymmetric/Toda-Yamamoto causality reveal the
existence of size distortion when the asymptotic Granger causality is used. The main policy implication of the findings is that monetary authorities can ensure exchange rate stability through accountability and transparency in contractionary or expansionary policies in aggregate demand using monetary policy instrument.
11 citations
References
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TL;DR: In this paper, the authors developed a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary.
Abstract: This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a univariate equilibrium correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all regressors are purely I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. Copyright © 2001 John Wiley & Sons, Ltd.
13,898 citations
"Does Pakistan Need To Adopt Inflati..." refers background or methods in this paper
...The computed test is then compared with the range provided by Pesaran et al. (2001)....
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...With one regressor and for a 95% confidence level, the range for the critical F-test is 4.94-5.73 (Table C1.iii in Pesaran et al., 2001, unrestricted intercept and no trend)....
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...I follow the approach in Pesaran et al. (2001), which can be applied regardless of whether the variables are I(0) or I(1)....
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01 Jan 2001
TL;DR: In this paper, the authors consider the relationship between causation and co-integration, and suggest that if a pair of I(1) series are cointegrated, there must be causation in at least one direction.
Abstract: The paper considers three separate but related topics. (i) What is the relationship between causation and co-integration? If a pair of I(1) series are co-integration, there must be causation in at least one direction. An implication is that some tests of causation based on different series may have missed one source of causation. (ii) Is there a need for a definition of 'instantaneous causation' in a decision science? It is argued that no such definition is required. (iii) Can causality tests be used for policy evaluation? It is suggested that these tests are useful, but that they should be evaluated with case.
1,503 citations
"Does Pakistan Need To Adopt Inflati..." refers background in this paper
...In this case, the error correction model allows for the finding that the one variable Granger-causes the other one, as long as the error correction term carries a significant coefficient, even if the coefficients of the differenced terms, i.e., iβ , are not jointly significant (Granger, 1988)....
[...]
341 citations
"Does Pakistan Need To Adopt Inflati..." refers methods in this paper
...The equations were specified in error correction form (Bårdsen, 1989), with annual, quarterly and monthly data....
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TL;DR: Using a sample of about 160 countries over the last thirty years, the authors test for the quantity theory relationship between money and inflation and find a strong positive relation between the long-run inflation and money growth rate.
Abstract: Using a sample of about 160 countries over the last thirty years we test for the quantity theory relationship between money and inflation When analysing the full sample of countries we find a strong positive relation between the long-run inflation and money growth rate The relation is not, however, proportional The strong link between inflation and money growth is almost wholly due to the presence of high (or hyper-) inflation countries in the sample The relationship between inflation and money growth for low inflation countries (on average less than 10% per annum over the last 30 years) is weak We find that the long-run average inflation and country-specific factors have a significant influence on the strength of the relationship We also confirm that money growth and output growth are orthogonal in the long-run; ie higher growth rates of money do not lead to higher growth rates of output
278 citations
TL;DR: The authors assesses inflation targeting in emerging market economies (EMEs) and develops applied prescriptions for the conduct of monetary policy and inflation-targeting design in EMEs, recommending high levels of transparency and communication with the public and the development of more stable institutions.
Abstract: This paper assesses inflation targeting in emerging market economies (EMEs) and develops applied prescriptions for the conduct of monetary policy and inflation-targeting design in EMEs. We verify that EMEs have faced more acute trade-offs-higher output and inflation volatility-and worse performance than developed economies. These results stem from more pronounced external shocks, lower credibility, and a lower level of development of institutions in these countries. To improve their performance, we recommend high levels of transparency and communication with the public and the development of more stable institutions. At an operational level, we propose a procedure that a central bank under inflation targeting can apply and communicate when facing strong supply shocks, and we suggest a monitoring structure for an inflation-targeting regime under an International Monetary Fund (IMF) program.
269 citations