This dissertation consists of three independent essays on monetary policy in Pakistan. The first essay deals with the estimation of Taylor (1993) rule for Pakistan and investigate whether the rule, if followed, leads to an improvement in macroeconomic performance of the economy as modern macroeconomics literature predicts. We also assess the optimal weights for inflation and output and the level of inflation to be targeted by State Bank of Pakistan. Ordinary least squares (OLS) technique is used to estimate Taylor rule for Pakistan using quarterly data over the period 1991 Q1 to 2005 Q4. The results indicate that the SBP has not been following the Taylor rule in the period under consideration, rather the actual policy seems to be in extreme deviation from it. Assuming Taylor rule as monetary policy strategy we then analyzed macroeconomic performance – in terms of reduced variability in inflation and output— in comparison to actual behavior of the economy. Results from backcasting the economy, based on a small macro model, confirm that macroeconomic performance could have been improved by following a simple Taylor rule. The model also predicts that performance can further be improved by setting inflation target and relative weights to the policy objectives according to the conditions of the economy rather than relying on the ones suggested by Taylor (1993). The second essay deals with identification of monetary policy objectives in Pakistan. Taylor (1993) rule assumes only two objectives for monetary policy, viz. output and inflation. In practice, however, central banks are entrusted with other objectives as well, such as interest rate smoothing and exchange rate stabilization. We also focus on identification of other variables that may potentially explain variation in the short term interest rate – the monetary policy instrument. A Vector Autoregression (VAR) model is estimated for the period 1993Q1 to 2005Q4, to predict the monetary authority’s response to the hypothesized policy objective variables. The results are consistent with economic theory; short interest rate responds positively to output gap, inflation, trade deficit and exchange rate but negatively to changes in the foreign exchange reserves and government borrowing from the central bank. We also discover that most of the variation in the interest rate is explained by its own lagged values followed by inflation, government borrowing, exchange rate, output gap, trade deficit and foreign exchange reserves. The third essay deals with the monetary policy transparency issues in Pakistan. By virtue of making policy more predictable, transparency of the central bank is assumed to solve the time inconsistency problem pointed out by Kydland and Prescott (1977). Notwithstanding the importance of monetary policy transparency in the literature, no effort has been made so far to analyze this issue with respect to the State Bank of Pakistan (SBP). We have used Eijffinger and Geraats (2006) index to measure independently, the transparency level of SBP actions regarding monetary policy and to compare this with that of the most advanced central banks. According to that index SBP has been awarded the aggregate score of 4.5 out of 15, which is lower than any of the central banks’ score in Eijffinger and Geraats (2006). SBP is completely opaque on the procedural issues, whereas it is least transparent in the policy transparency. On the political and the economic matters, SBP is partially transparent. An area where SBP is quite transparent with moderate score is the operational transparency. In comparison with the other central banks, SBP is at par with some of the central banks in the political and the operational transparency but quite behind on all other fronts. Supervisor:- Dr. Athar Masood