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Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan (Article)

Author

Listed:
  • Fayyaz Hussain

    (Senior Joint Director, State Bank of Pakistan, Karachi.)

  • Mehak Ejaz

    (Associate Professor, Usman Institute of Technology, University (UITU), Karachi.)

Abstract

The exchange rate is one of the most important channels of monetary policy transmission to the real economy. However, the effectiveness of this channel depends on the extent of exchange rate flexibility, degree of international capital mobility, and inflation expectations. Like other emerging economies, Pakistan is typically characterised by weak fiscal and monetary institutions, currency substitution, liability dollarisation, and vulnerability to sudden stops of capital flows. These features compel emerging economies to follow managed exchange rate regimes by restricting the mobility of capital flow. All these factors weaken the effectiveness of the exchange rate channel of monetary policy transmission. This study estimates the effectiveness of the exchange rate channel in monetary policy transmission in Pakistan and explores the impact of exchange rate regimes on the channel’s strength.

Suggested Citation

  • Fayyaz Hussain & Mehak Ejaz, 2022. "Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 45-67.
    • Handle: RePEc:pid:journl:v:61:y:2022:i:1:p:45-67
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    More about this item

    Keywords

    Monetary Policy; Transmission Channels; Pakistan; Exchange Rate; Exchange Rate Regimes; Structural VARs;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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