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Financial Stability And Monetary Policy Reaction Function For South Asian Countries: An Econometric Approach

Author

Listed:
  • SAMIA NASREEN

    (Department of Economics, Government College Women University Faisalabad, Faisalabad, Punjab, Pakistan)

  • SOFIA ANWAR

    (Department of Economics, Government College University Faisalabad, Faisalabad, Punjab, Pakistan)

Abstract

This study empirically investigates a monetary policy reaction function for South Asian economies by incorporating financial stability as an additional policy objective in the central bank’s loss function. Empirical results are estimated by applying auto-regressive distributed lag (ARDL) approach to cointegration and vector autoregressive (VAR) approach using time-series data of five South Asian countries, namely, Pakistan, India, Bangladesh, Nepal and Sri Lanka. Estimated results indicate that monetary policy significantly reacts to the level of financial stability in all countries. The result further suggests that central banks would tighten monetary policy if output gap widens and exchange rate depreciate. In addition, central banks of Pakistan and India do not respond significantly to inflation gap.

Suggested Citation

  • Samia Nasreen & Sofia Anwar, 2023. "Financial Stability And Monetary Policy Reaction Function For South Asian Countries: An Econometric Approach," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 68(03), pages 1001-1030, June.
    • Handle: RePEc:wsi:serxxx:v:68:y:2023:i:03:n:s0217590819500395
    DOI: 10.1142/S0217590819500395
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    Keywords

    Financial stability; AFSI; monetary policy; Taylor rule; South Asia;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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