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Research Paper on

Importance of Monetary Policy in a developing country (Pakistan)

Submitted by
Amber Masud Kayani (0958134)
EMBA

Submitted to
Sir Syed Qamar Ali Zaidi

Submission date : 28th Nov,2010

Shaheed Zulfiqar Ali Bhutto Institute of Science & Technology(SZABIST) 90 Clifton, Karachi
Table of Contents

Titles Page no.

1. Abstract ……………………………………………………….……………..…… 3 2. Introduction………………………………………………………………..……… 4 3. What is a Monetary Policy? ………………………………………………..…... 5 4. Objectives of Monetary Policy ……………..………………………………….… 5 5. Monetary Policy Framework in Pakistan…………………………………..…… 6 6. State Bank uses tools of Monetary Policy. ..………………………… ………... 6 7. How does Monetary Policy affect the economy of a country... ………………... 7 8. How does Monetary Policy affect Inflation…………………..…………….…… 8 9. Effectiveness of Monetary Policy in Developing Countries …………………… 8 10. Effectiveness of Monetary Policy in Pakistan…………………………………... 8 11. What needs to be done to improve the effectiveness of Monetary Policy?......... 9 12. Conclusion………………………………………...........................................……. 9 13. Summary…………………………………………………………………………. 10 14. References ………………………………………………………………………...10

Abstract:

Price and output stabilities determine the success of monetary policy in either economy. This paper briefly examines the monetary policy strategies of developing countries It is found that the developing countries follow ill-organized monetary system do not follow the rule-based policy, rather they often formulate and launch policies under some discretionary framework. The fundamental objective of this study is to examine the performance of rule-based monetary policy in developing countries by extracting experience from developed ones. This paper attempts to investigate the linkage between the excess money supply growth and inflation in Pakistan and to test the validity of the monetarist stance that inflation is a monetary phenomenon. The results from the correlation analysis indicate that there is a positive association between money growth and inflation. The money supply growth at first-round affects real GDP growth and at the second round it affects inflation in Pakistan. The important finding from the analysis is that the excess money supply growth has been an important contributor to the rise in inflation in Pakistan during the study period, thus supporting the monetarist proposition that inflation in Pakistan is a monetary phenomenon. This may be due to the loose monetary policy adopted by the State Bank of Pakistan to show the high priority of the growth objective. The important policy implication is that inflation in Pakistan can be cured by a sufficiently tight monetary policy. The formulation of monetary policy must consider development in the real and financial sector and treat these sectors as constraints on the policy.

Introduction:

Monetary policy is one of the tools that a Government uses to influence its economy. Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy is usually administered by a Government appointed "Central Bank" like the State Bank of Pakistan. Pakistan’s monetary policy is concerned with how much money circulates in the economy, and what that money is worth. The ultimate objective of monetary policy is to promote solid economic performance and higher living standards for Pakistani’s. The best way...
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