MONETARY POLICY IN AFGHANISTAN: IS IT EFFICIENT

This study tries to assess the central bank of Afghanistan’s monetary policy towards targeting important economic variables e.g. inflation, changing the exchange rate and bringing price stability. To do the analysis at the first stage importance of exchange rate discussed with the help of correlation analysis and further for the analysis two separate regression models were used. The first model examined the relationship between exchange rate, foreign currency, and capital notes sold on the market. The second model concentrated on understanding the relationship between the amounts of narrow and broad money in circulation and the CPI. The data for the analysis collected from Afghanistan central statistical organization (CSO), central bank yearly reports, and via direct contact to central bank’s supervision department. The accessible data was from April 2012 to December 2018 which is in total 81 months. The results of the correlation analysis of macroeconomic indicators with exchange rate shows that most of the indicators has correlation with exchange rate by having R 2 more than 50 percent, however only GDP growth has significant p-value at 0.05 level. Result of the first model show that only 40 percent of changes to the exchange rate were caused by Da Afghanistan Bank selling foreign currency and capital notes. The coefficient related to the effect of the sale of foreign currency on the exchange rate had a negative sign, with a significant p-value. However, the coefficient of capital notes had positive sign, which goes against the theoretical argument behind the sale of capital notes. The results of the second model show that changes in the amounts of narrow money and broad money are responsible for 47 percent of changes in the CPI. However, the impact is weak and huge changes in the amount of money in circulation are required to change the CPI. Overall, it could be argued that the monetary policy of the central bank is more effective at influencing the exchange rate, but the government should also consider other factors which influence the price stability. Keywords— Inflation, Price Stability, Money Supply, Exchange Rate, Consumer Price Index