ABSTRACT

This study aims to look deep into Pakistan’s monetary policy to investigate how the reaction function of Pakistan’s monetary policy has evolved over time and how the monetary policy can be redefined from the perspective of Pakistan. To that aim, a mixed approach (i.e. both quantitative and qualitative approaches) is used. For quantitative analysis of monetary policy, the time-varying threshold Taylor rule has been estimated to find that what are the triggering points above and below which policy behaves differently. Pivotal variables of monetary policy i.e. inflation and output gap have been considered as threshold variables and their time-varying threshold values have been estimated based upon secondary data. The study covers the time span of more than forty years i.e. from 1977 to 2020 and inflation rate, output gap, exchange rate, and lagged interest rate are considered as the explanatory variables of monetary policy. The time-varying threshold values of inflation are found to be 3.75%, 7.95%, and 10.41% while the time-varying threshold values of the output gap are estimated as -1.74%,1.90,% and 3.90%. The study found the asymmetry in the monetary policy conduct whilst it is also found that explanatory variables don’t significantly behave differently above and below different thresholds. For qualitative analysis interviews of prestigious members of monetary policy were conducted. The process of making monetary policy decisions has evolved over the years (from money aggregate targeter to flexible inflation targeter) and won’t stop revolving in the future as well. The need is to conduct more rigorous analysis of the economic data as well as trends with the keen judgement of the changing economic landscape to formulate more effective monetary policy.