A analysis of the monetary policy In Pakistan

Monetary Policy is the policy conduct by central bank for correcting macro economic problems such as the management of the money supply, interest rates, to control inflation and other major macro issues. Monetary Policy by the Central Bank is implemented by using different instrument like Open Market Operations, changes in Banks eser!es atio and by !arying interest rates. In Pakistan it is conducted by "tate Bank of Islamic epublic Pakistan. "tate Bank also #orks as a guide and ad!isory to the go!ernment #hich pro!ides suggestions to the go!ernment on ho# to correct the macro problems. $here are t#o basic types of the Policy. Contractionary and %&pansionary Monetary Policy. $he aim of this paper is to analyse and e&amine the implications and the changes in the monetary policy more specifically #ith reference to Pakistan economy. 'o# to conduct monetary policy is the critical (uestion to all the policy makers. )or Policy Makers the main objecti!e of monetary policy is to slo# do#n the inflation in an economy because inflation ad!ersly affects the o!erall economic gro#th, the de!elopments in the financial sector and the poor people also.Inflation is said to be more harmful than unemployment as it reduces the real income and also increase the uncertainity of the money !alue. $he !olatility of the and increased surge #ithin de!eloping #orld to participate in the global markets ha!e created ne# challenges for the policy makers. $he prime objecti!e of the policy makers is to keep the prices stable and maintain the fluctuations in e&change rates. Pakistan like de!eloping poor countries is also suffering from macroeconomic imbalances and is also ha!e e&tremely high foreign and internal debt. *o# foreign reser!es, high nominal interet rates and lo# reser!es. Most of the countries ha!e adopted inflation targeting monetary policies #hich are the lessons for Pakistan to control inflation. As it is sadi that inflation is more harmful than unemployment

*iterature e!ie#+ Inflation in Pakistan is rising since decades and many other countries due to #eakened international financial markets and supply shocks such as increase in oil and energy prices. $o cater do#n the increasing inflation since the early ,-.-s Policy Makers ha!e emphasi/ed on Inflation $argeting Policy to stabili/e the prices in an economy. Price stability here does not mean the /ero inflation or constant prices in an economy but a le!el of prices to achie!e the target inflation. 0e# /eland #as the first country #ho adopted Inflation $argeting policy and later on other countries in latin america, asia and europe also adopted Inflation $argeting monetary policy. "tate Bank of Pakistan o!er the years specially since 1--- ha!e e&perimented policies to abate the inflation rate but it like other emerging economies still needs to think #hat kind of policy should be adopted to keep inflation rate lo# and #hat are the necessary conditions to become a part of the global economy. $he emerging economies of *atin America #ho ha!e inflation target policies ha!e sho#n satisfactory results and suggest that I$ policy can stabili/e the prices. Openness of the economy and imported inflation are also the reasons of high inflation rate in Pakistan. $hus Pakistan needs a good theoretical model and some empirical estimates to understand the pricing mechanism in Pakistan. 23halid, 1--45 )iscal Policy and Monetary Policy is called sister policies to stabili/e the price le!els and macro imbalances. 6hich policy is to adop is of the main concern. In ,.7-s the mi& of the policies ha!e created stagflation in the country. $he funnel theory of $obins that is the mi&ture of keynesian and neoclassical #as of the keen interest for some economics. $he argument #as that the ta& rate and money gro#th together leads to stagflation in the economy. 3eynes said that if the main objecti!e of the central banks is to achie!e high output and economic gro#th it must increase the money supply une&pectedly but the term li(uidity trap introduces should not be ignored #hich means if the rate of interest falls to a lo# le!el then increase in money supply is not the solution for output and economic gro#th because the cenrtral bank can not decrease the interest rate after a certain lo# le!el. 2Ali, Irum, 8 Ali, 1--95 $hey further ha!e sho#n that monetary policy in Asian countries like

Pakisan, Bangladesh, "ri *anka and India is more effecti!e. 'o#e!er a careful amalgam of both fiscal and monetary policy can pro!ide the better results for stable economic gro#th. Pakistan is facing inflation since long and "tate bank of Pakistan is trying to cater do#n the inflation by follo#ing tight monetary policy. $ight monetary policy is continuously practised since 1--4 but the results are not satisfactory. Interest rate and inflation rate in Pakistan are rising since decades and it is said that if interest rate and inflation rate rises simultaneously causes price pu//le. 2:a!id 8 Munir, 1-,-5 $hey also sho#n that o!er the ;9 months hori/on contractionary policy leads to rise in price le!el #hereas it is belie!ed that tight monetary policy reduces the prices le!el instead of rising it. $ight monetary policy has therefore little effects on the macro system in current conditions. 'o#e!er it further reduces in!estment and discourages the business sector. $herefore monetary and fiscal policy should be used to gather for better outcome. Monetary policy alone may not control the inflation and price le!el.