Open AccessAdopting Inflation Targeting in Pakistan: An Empirical Analysis
Author(s) -
Nadia Saleem
Publication year - 2010
Publication title -
the lahore journal of economics
Language(s) - English
Resource type - Journals
eISSN - 1811-5446
pISSN - 1811-5438
DOI - 10.35536/lje.2010.v15.i2.a3
Subject(s) - economics , inflation targeting , transparency (behavior) , monetary policy , inflation (cosmology) , price of stability , monetary economics , economic stability , real interest rate , macroeconomics , political science , physics , theoretical physics , law
The objective of this paper is to assess the conditions for inflationtargeting in Pakistan. The recent inflationary surge in Pakistan calls forrethinking monetary policy afresh. This paper argues the case for inflationtargeting in Pakistan as a policy option to achieve price stability. The countryexperienced an inflation rate of just below 10 percent during 1970-2009, whichmakes it a potential candidate for inflation targeting. Applying the VARtechnique to data for the same period, inflation is shown to be adaptive in nature,leading us to reject the accelerationist hypothesis. The Lucas critique holds aspeople are found to use forward-looking models in forming expectations aboutinflation. The paper also sheds some light on the State Bank of Pakistan’s level ofpreparedness for the possibility of adopting inflation targeting, for whichtransparency and autonomy are prerequisites. The interest rate channel can playthe role of a nominal anchor in the long run.