Effectiveness of Monetary Policy Stance to Curtail Inflation in Pakistan During 2001-2009: A Quantitative Measure Analysis

Abstract

This article has quantitatively analyzed the impact of monetary policy measures in Pakistan during 2001 to 2009. The study has focused the treasury bill rate and exchange rate has two main stream monetary tools to achieve objectives. There were five incidents of contractionary (tight) monetary policy and four incidents of expansionary (loose) monetary policy. A theoretical approach that inflation is always a monetary phenomenon is in-fact not often correct especially when the externalities impact tend higher than the fiscal and monetary measure such as weather, law and order and others. The CPI based inflation remained all time high during the period of year 2007-08 with 19.74 percent change in index price that is followed by subsequent period during year 2008-09 with 12.65 percent change. There was only the period of year 2002-03 where CPI based inflation was even lower than base period. Although over all monetary policy stance during this analyzed nine periods has been soft or expansionary. However during the period of 2004-05 SBP raised the Treasury bill rates by the end of April 2005 to curtail the demand pull inflation, which was a stimulus of consumer financing by commercial banks. A 138.231 percent rise in T.Bill rate had been all time high rates since year 2001 to 2009. Soon after such an episode which may be regarded as delayed monetary measure of SBP to curtail the inflation, SBP continued to maintain the raised T.Bill rate for attracting excess liquidity within banking system. Further, the average exchange rate of Pak Rs. to US$ had appreciated for five times and depreciated for four times since 2001 to 2009. The sterilization process by SBP to support the US$ foreign exchange reserves was responsible for Rs. depreciation within the domestic exchange market