Monetary Policy and Its Effect on Economy
1. The effectiveness of monetary policy in Pakistan
ARTICLE (December 09 2008): Alongside is the text of the speech of the Governor, State Bank of Pakistan, at the Institute of Business Management on December 6. Economic policies aim to increase the welfare of the general public, and monetary policy supports this broad objective by focusing its efforts to promote price stability. Embedded in this objective is the belief that persistent inflation would compromise the long term economic prospects of the country.
The objective of monetary policy in Pakistan, as laid down in the SBP Act of 1956, is to achieve the targets of inflation and growth set annually by the government. In pursuit of this mandate, SBP formulates the country's monetary policy that is consistent with these announced targets. In my remarks today, I plan to provide perspective on:
• First, why central banks focus on price stability?
• Second, how the monetary policy transmission mechanisms work?
• Third, what are the principal features of Pakistan's monetary policy framework?
• Fourth, selected thoughts on effectiveness of Pakistan's monetary policy framework
• Finally, what measures are needed to improve the effectiveness of the monetary policy framework in Pakistan?
These questions have been a subject of much debate lately, as monetary tightening - an inevitable policy response for regaining macroeconomic stability - has aroused anxiety but better public understanding of this question will help them to appreciate central bank's monetary policy stance.
WHY FOCUS ON PRICE STABILITY?
Before getting into other intricacies of monetary policy, it is useful to bring forth the importance of price stability as an overriding objective of monetary policy. Actual inflation outcome in the economy is driven largely by the level of output gap (the difference between what the economy is demanding and what it can potentially produce) and inflation expectations.
When the output gap
ARTICLE (December 09 2008): Alongside is the text of the speech of the Governor, State Bank of Pakistan, at the Institute of Business Management on December 6. Economic policies aim to increase the welfare of the general public, and monetary policy supports this broad objective by focusing its efforts to promote price stability. Embedded in this objective is the belief that persistent inflation would compromise the long term economic prospects of the country.
The objective of monetary policy in Pakistan, as laid down in the SBP Act of 1956, is to achieve the targets of inflation and growth set annually by the government. In pursuit of this mandate, SBP formulates the country's monetary policy that is consistent with these announced targets. In my remarks today, I plan to provide perspective on:
• First, why central banks focus on price stability?
• Second, how the monetary policy transmission mechanisms work?
• Third, what are the principal features of Pakistan's monetary policy framework?
• Fourth, selected thoughts on effectiveness of Pakistan's monetary policy framework
• Finally, what measures are needed to improve the effectiveness of the monetary policy framework in Pakistan?
These questions have been a subject of much debate lately, as monetary tightening - an inevitable policy response for regaining macroeconomic stability - has aroused anxiety but better public understanding of this question will help them to appreciate central bank's monetary policy stance.
WHY FOCUS ON PRICE STABILITY?
Before getting into other intricacies of monetary policy, it is useful to bring forth the importance of price stability as an overriding objective of monetary policy. Actual inflation outcome in the economy is driven largely by the level of output gap (the difference between what the economy is demanding and what it can potentially produce) and inflation expectations.
When the output gap