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Monetary Conditions Index for Pakistan

Author

Listed:
  • Zulfiqar Hyder

    (State Bank of Pakistan)

  • Muhammad Mazhar Khan

    (State Bank of Pakistan)

Abstract

The paper discusses how changes in interest rate and exchange rate, through Monetary Conditions Index (MCI), are used for assessing the overall monetary policy stance. The weights for construction of MCI are derived using the Johansen’s cointegration techniques. The constructed MCI indicates that Pakistan has eight tight and six soft periods of monetary stance during March 1991 to April 2006. Exchange rate movements and interest rate changes together determine MCI before September 2001. MCI moved largely with the changes in interest rate after the September 2001 events, as rupee appreciated due to surge in remittances and incomplete sterilization of forex flows led to unprecedented reduction in interest rates. MCI reflects tightening of monetary stance from January 2004 after the bottoming out of interest rates due to inflationary concerns.

Suggested Citation

  • Zulfiqar Hyder & Muhammad Mazhar Khan, 2007. "Monetary Conditions Index for Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 3, pages 165-190.
    • Handle: RePEc:sbp:journl:28
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    References listed on IDEAS

    as
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    Cited by:

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    2. Fizza Malik, 2016. "Modeling Dynamics of Exchange Rates Volatility: A Case of Pakistan from 1980-2010," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(3), pages 144-161, September.
    3. ?lyas ??klar & Burhan Do?an, 2015. "Monetary Condition Index with Time Varying Weights: An Application to Turkish Data," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 117-132, June.
    4. Mna, Ali & Younsi, Moheddine, 2018. "A Monetary Conditions Index and its Application on Tunisian Economic Forecasting," MPRA Paper 83648, University Library of Munich, Germany.
    5. Aadil Nakhoda, 2014. "The Influence of Industry Financial Composition on the Exports from Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 10, pages 21-49.
    6. Andrzej Toroj, 2011. "Competitiveness channel in Poland and Slovakia: a pre-EMU DSGE analysis," NBP Working Papers 86, Narodowy Bank Polski.
    7. Muhamed Zulkhibri Abdul Majid, 2012. "Measuring monetary conditions in a small open economy: the case of Malaysia," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 4(3), pages 218-231, July.
    8. Yunus AÇCI, & Izzet TASAR, 2016. "An Analysis On Monetary Condition Index In Turkey By Using Structural Var Analysis," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 5(2), pages 1-14, July.
    9. Shazia Sana & Shahnawaz Malik & Muhammad Ramzan Sheikh, 2022. "Investigating The Effectiveness Of Channels Of Monetary Transmission Mechanism In Pakistan: An Application Of Var Model, Impulse Response Function And Variance Decomposition," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 11(2), pages 160-184, June.
    10. Arjeta Vokshi (Abazi), 2013. "A Monetary Conditions Index For Albania," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 1(15), pages 1-18.
    11. Torój, Andrzej, 2010. "Adjustment capacity in a monetary union: a DSGE evaluation of Poland and Slovakia," MF Working Papers 4, Ministry of Finance in Poland, revised 11 May 2010.
    12. Manamani SAHOO, 2017. "Financial conditions index (FCI), inflation and growth: Some evidence," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(612), A), pages 147-172, Autumn.

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    More about this item

    Keywords

    Monetary Conditions Index; Interest Rate Channel; Exchange Rate Channel;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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