Central Bank Independence and Implementation of Monetary Policy

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State Bank of Pakistan

Monetary Policy Department - Internship Project

“Central Bank’s Independence and Implementation of Monetary Policy”

By Raza Ali - SZABIST, Karachi & Farhan Ahmed - SZABIST, Larkana August- 2012

Internship Report

CERTIFICATE

It is to certify that this report submitted by Mr. Raza Ali and Mr. Farhan Ahmed is accepted in its present form by the Monetary Policy Department, State bank of Pakistan Karachi, as satisfying for the requirement for partial fulfillments of the Internship Program.

Supervisor Javed Iqbal

Central Bank’s Independence and Implementation of Monetary Policy

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Internship Report

Acknowledgement

We would like to thank Mr. Javed Iqbal (Monetary Policy Department) for his support and guidance during the preparation of this report. We would also like to extend our gratitude to the other staff members of the Monetary Policy Department who have remained supportive during our internship. We would like to thank the State Bank of Pakistan for providing us with this valuable opportunity and resources to conduct our research.

Central Bank’s Independence and Implementation of Monetary Policy

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Internship Report

Abstract

Economic indicators like Inflation, GDP growth, Borrowing from Central bank, Monetary Policy and CBI, Nominal and Real interest rates, Wage rates and Output sacrifice ratio have been analyzed to explore the effectiveness of Monetary Policy in Pakistan. Analysis of various economic indicators show that performance on these indicators could have been better had our monetary authorities had more autonomy.

Central Bank’s Independence and Implementation of Monetary Policy

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Internship Report

Table of Contents

Introduction………………………………………………………………………………………………………………Page06 Literature Review………………………………………………………………………………………………………Page7-9 Defining Central Bank Independence (CBI)………………………………………………………………..Page10 Measuring Central Bank Independence (CBI)……....……………………………………………….Page11- 12 CBI & Economic Performance……….……………………………………………………………………….Page13-16 Conclusion…………………………………………………………………………………………………………………Page17 References…………………………………………………………………………………………………………………Page18

Central Bank’s Independence and Implementation of Monetary Policy

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Internship Report

1. Introduction The Central bank of any country plays a vital role in the economy of that country. It plays a major role by being Government’s bank and helps Government in smooth running of economic affairs by maintaining the price stability in the system. Historically, the role of the Central bank was to print money, hold foreign reserves, formulate monetary policy and act as Lender of Last Resort (LOLR). The beginning of the 1990’s marked the new era in the history of central banks’ roles, when Reserve Bank of New Zealand was granted the clear objective of maintaining the price level stability in the economy with operational independence to achieve this objective. Soon Bank of Australia, England and Canada were granted the same autonomy. But this only objective was confined with central banks of developed countries, whereas central banks in developing countries are performing another role and that is to support growth in the economy. Developing nations’ central banks have since then have shifted their focus in order to achieve these goals. Historical data of Inflation and GDP growth of developing nations suggest that these both goals have not been achieved, if achieved then their sustainability remains short. This may be due to some missing factors like Central Bank’ Independence and autonomy whether in goal setting or in ways through which it achieves its goals. Thus the objective of the study is to find out whether SBP, in its completion of goals is independent or not? And is there any relationship between CBI, macroeconomic variables and effective implementation of monetary policy. Section 1 covers literature review, section 2 of this paper...
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