Effectiveness of Monetary Policy in Controlling Exchange Market Pressures in Pakistan
Author: Nasir Hamid Rao

This study has two prime objectives. First, to construct an Exchange Market Pressure Index based on, following model dependent approach, Structural Vector Auto Regression Model for the period of January 1991 to April 2019 in the case of Pakistan. Second, to assess monetary policy’s effectiveness in controlling foreign exchange pressure markets. To assess the effectiveness of monetary policy in controlling exchange market pressures in Pakistan through SVAR for short run. It is important to mention that the analysis of last three bailout requests to IMF reveals that Pakistan has aggressively used monetary policy to tackle exchange market pressures – 500 basis point increase in policy rate before 2008 program, 100 basis point increase in policy rate before 2013 program and 650 basis points in policy rate so far before the expected program. However, no effort has been made to assess the effectiveness of the policy. This study is pioneer work on assessment of effectiveness of monetary policy to control exchange market pressures in Pakistan. Study found that monetary policy is effective in controlling exchange market pressures in Pakistan for the shorter run, neutral for the longer run and counter-productive for the medium run. The constructed index clearly depicts the level of active management of exchange market pressures by the central bank of Pakistan. Study also reveals that Pakistan has exhausted around USD 112 billion to provide market support in order to keep exchange parity at some prescribed level. However, the policy failed miserably as support of billions of dollars has yielded management of exchange rate by only Rs. 35.92. Another interesting finding of the study is that, had policy makers not attempted to manage exchange rate, the current parity level would have been around Rs. 177.43 per dollar – which is only Rs. 35.92 higher than the prevailing exchange rate of Rs. 141.51 per dollar. Study concluded that central bank’s intervention approach failed to control exchange market pressures for Pakistan. Every effort to do so, resulted in exhausting reserves and overshooting of exchange rate. Study also found that to keep exchange parity in check, central bank needs to continuously bridge the supply demand gap of the exchange market. As soon as, central bank decides to refrain from bridging such gap, parity corrects itself through market forces. Study also concluded that, for the longer run, it is a loss-loss situation for the country – as billions of dollars spent only succeeded to manage exchange parity of Rs. 35.92. Supervisor:- Dr. Abdul Jalil

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Keywords : Controlling Exchange, Market Pressures in Pakistan, MONETARY POLICY
Supervisor: Abdul Jalil

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