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Choice of Monetary Policy Regime: Should SBP Adopt Inflation Targeting

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  • Moinuddin

    (State Bank of Pakistan)

Abstract

Monetary aggregate targeting is principally based on a stable and predictable relationship between inflation and monetary aggregate(s). However, structural changes both in the economy as well as in the financial sector, financial innovation and increasing application of technology have significantly weakened the relationship between inflation and money. The major finding of this paper is that money demand function is unstable in Pakistan, therefore monetary aggregate targeting is not suitable. Consequently, inflation targeting (IT) may be an option for the central bank since IT is becoming popular in both developed and emerging economies due to its superior qualities of easy to understand target, flexibility, transparency and being more amenable to accountability. However, some pre-requisites such as fiscal prudence, independence of central bank, legislative support, availability of an appropriate measure of inflation and improvement in technical skills of the staff are required before the adoption of IT. In the meantime, IT Lite is a viable option for the State Bank of Pakistan (SBP). Length: 28 pages

Suggested Citation

  • Moinuddin, 2007. "Choice of Monetary Policy Regime: Should SBP Adopt Inflation Targeting," SBP Working Paper Series 19, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:19
    as

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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp19.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation targeting; money demand function; monetary policy regime;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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