Monetary Policy - Evaluation of the Present Monetary Policy Framework and Future Tasks of Pakistan

Monetary Policy

Evaluation of the present monetary policy framework and future tasks of Pakistan

Student Name

M. Zohaib Alvi

Korea Advanced Institute of Science and Technology

Abstract

Monetary policy is one of the key areas of concern for any developing country. It is instrumental in jump starting the economy and plays an important part in the overall financial sector development of a country.

The State bank of Pakistan (SBP) is the sole authority to formulate and implement monetary policy in Pakistan. Historically, the SBP had been under direct supervision of the federal government and has not had the chance to formulate an independent monetary policy stance. However, new legislations have passed that guarantee SBP’s operational and financial independent from the federal government. SBP has now been conducting monetary policy with relative independence.

SBP implemented the current monetary policy regime in 2005. The bank was previously conducting its monetary policy based on aggregate demand and supply. The new framework is focuses on maintaining price stability and ensuring stable economic growth. SBP now makes adjustments in the policy rate in the direction it deems necessary to control inflation close to its target while keeping in view a number of factors like economic growth, Investment, Savings etc. Hence, its approach is more in line with the approach of the Federal Reserve (FED).

This paper tries to analyze and assess the performance of this new monetary policy framework employed by SBP. It will try provide a definitive answer as to the success of monetary policy stance of SBP.  

Contents

Chapter 1. Introduction        2

Chapter 2. Literature Review        4

Chapter 3. Monetary Policy Framework of Pakistan        6

Chapter 4. Evaluation of Monetary Policy Framework of SBP        13

Chapter 5. Concluding Remark        18

Bibliography        19

Chapter 1. Introduction

Monetary policy is a key factor of macroeconomic management in opened economy to stimulate economic stability and to promote economic development through its impact on economic variables. It is a generally accepted wisdom by most policy makers that monetary policy influences macroeconomic variables which include employment, price stability, Gross Domestic Product growth and equilibrium in the balance of payment in developing country (Anowor & Okorie, 2016). The role of monetary policy on the economic development is greatly dependent on how it is conducted by an independent central bank with freedom to choose appropriate monetary tools to formulate the monetary policy (Alavinasab, 2016).