It is proved in the literature that monetary policy rules are better than discretion. The success of monetary policy rule is associated with price and output stabilities. In this study we examine different monetary policy rules for Pakistan economy. The main objective of our study is to find an optimal monetary policy for Pakistan economy. For this purpose we examine Friedman’s rule, McCallum rule and Taylor rule. On the basis of the ability of a rule to minimize the loss function we define the optimality of a rule. Our study provides a comparative analysis. We compare the performance of all rules on the basis of their ability to minimize loss function and then find an optimal monetary policy rule. The optimal monetary policy rule has the maximum ability to minimize the loss function. In this study we used quarterly data from 1991:01 to 2010:04. This study proposed “Strict inflation targeting rule with inertia” for the implementation of monetary policy in Pakistan. Supervisor:- Dr. Abdul Qayyum