Economic Growth, Inflation, and Monetary Policy in Pakistan: Preliminary Empirical Estimates

There is a growing debate in the emerging market on the choice of an appropriate monetary or exchange rate policy that could lead to a sustainable economic growth. Inflation targeting has become one of these policy alternatives and has recently been implemented in some of the emerging markets in Asia and Latin America. Given the recent remarkable economic performance of the Pakistan, this issue has also been discussed at various policy forums in Pakistan. An important pre-condition for the success of inflation-targeting is to identify the leading indicators of inflation and develop a model to reasonably forecast inflation. This is the main objective of this paper. Besides an overview of the experience, the main focus of the paper is to provide some preliminary empirical estimates for inflation equation and its causal relationship with other macroeconomic variables.

Financial Market Linkages in South Asia: Evidence Using a Multivariate GARCH Model

Regional integration of the financial markets is the building-block for globalisation and internationalisation. Many regions around the world have recently been engaged in such regional economic and financial market integration to form the basis of a more complex international financial system. The recent developments in South Asia and the revived activities under the SAARC forum have raised some hopes for a more sustained economic development in the regional economies. It is timely, therefore, to investigate the prospects of regional financial market integration in the South Asian region. In this perspective, this paper analyses the currency market integration within four South Asian countries and with their major trading partners. For empirical estimation, we use data from a sample of four South Asian countries, namely, India, Pakistan, Bangladesh, and Sri Lanka. The paper examines the nature of the causal relationship between exchange rates in the sample countries and their major trading partners. Both the short-run and the long-run causal relationships between these markets are examined using high-frequency data of exchange rates. The paper also explores whether the causal linkages between these variables are of similar intensity across the country and across the market. The nature of the mean and volatility transmission between stock and foreign exchange markets is explored through multivariate exponential GARCH model, which is capable of capturing asymmetries in the volatility transmission mechanism in both the short run and the long run within a co-integration framework. The departing feature of this approach is that it captures both linear and non-linear relationships, which are linked through second order moments. We believe that this to be fresh research on this issue for South Asia and it may have important implications for any future policy for the region.Financial Market, South Asia, GARCH Model

Corporate Governance for Banks in Pakistan: Recent Developments and Regional Comparisons

The emerging economies in the South Asian region have embarked on a bold reform process to develop the banking sector. This development has improved the transparency and accountability of the banking sector because these countries focused on ‘best practice’ corporate governance for banks. In view of a rapidly developing market with a slow pace of information dissemination, adverse selection and moral hazard problems are likely to be on the rise and may need a mechanism to train and discipline bank management. It was, therefore timely for the central banks in the region to introduce a ‘best practice’ for the banking system as a whole. This study provides a survey of recent developments in corporate governance of the banking sector in Pakistan and a comparison of similar developments in two other regional economies, namely, India and Bangladesh. In addition to a theoretical discussion on this issue, we also provide an overview of the banking sector restructuring and highlighting important features of the codes of corporate governance established by central banks in the sample countries. In conclusion, we present a comparison of the major differences in these measures across countries and comment on the pace of these developments.Corporate Governance, Banks, Pakistan

Corporate Governance for Banks in Pakistan : Recent Developments and Regional Comparisons

The emerging economies in the South Asian region have embarked on a bold reform process to develop the banking sector. This development has improved the transparency and accountability of the banking sector because these countries focused on best practice corporate governance for banks. In view of a rapidly developing market with a slow pace of information dissemination, adverse selection and moral hazard problems are likely to be on the rise and may need a mechanism to train and discipline bank management. It was, therefore timely for the central banks in the region to introduce a best practice for the banking system as a whole. This study provides a survey of recent developments in corporate governance of the banking sector in Pakistan and a comparison of similar developments in two other regional economies, namely, India and Bangladesh. In addition to a theoretical discussion on this issue, we also provide an overview of the banking sector restructuring and highlighting important features of the codes of corporate governance established by central banks in the sample countries. In conclusion, we present a comparison of the major differences in these measures across countries and comment on the pace of these developments.Banking, Corporate governance, banking sector restructuring

Economic Growth, Inflation, and Monetary Policy in Pakistan: Preliminary Empirical Estimates

The recent increase in financial market volatility and the increased surge within developing world to become part of the global market have posed several challenges for policy-makers in the emerging markets to decide on a policy regime— monetary or exchange rate—that suits their needs and could also provide stability to the financial system. In view of the macroeconomic characteristics of these emerging economies, the choice of an appropriate policy becomes important to achieve certain targets such as sizeable domestic and foreign investment, reduced reliance on external borrowings, fiscal discipline, etc. These would require both price and exchange rate stability and country’s ability to deal with external shocks to maintain and achieve sustainable economic growth. Pakistan is no different and until recently had a history of macroeconomic imbalances with extremely high foreign (as well as domestic) debt, high budget and current account deficits, extremely low international reserves, high inflation, high nominal interest rates and low economic growth. The average economic growth over 40 years is around 4 percent. The main focus of any policy has been to achieve a sustainable growth pattern. However, due to a number of macroeconomic imbalances such as high budget deficits, extremely high indebtedness, low savings and investment rates, lack of fiscal discipline, undeveloped financial markets, unstable exchange rates along with high population growth and huge defence expenditure made this task almost impossible. Some of these macroeconomic imbalances contributed to episodes of high inflation and unemployment that the country experienced during most of the period since independence

Testing Twin Deficits Hypothesis: Using VARs and Variance Decomposition

This paper examines the twin deficits hypothesis in Indonesia, Malaysia, the Philippines and Thailand (ASEAN-4 countries). The major findings of this paper are: (1) Long run relationships are detected between budget and current account deficits. (2) We found that the Keynesian reasoning fits well for Thailand since a unidirectional relationship exists which runs from budget deficit to current account deficit. For Indonesia the reverse causation (current account targeting) is detected while the empirical results indicate that a bidirectional pattern of causality exists for Malaysia and the Philippines. (3) We also found support for an indirect causal relationship that runs from budget deficit to higher interest rates, and higher interest rates lead to the appreciation of the exchange rate and this leads to the widening of current account deficit. (4) The results of the variance decompositions and impulse response functions suggest that the consequences of large budget and current account deficits become noticeable only over the long run.Twin deficits, Cointegration, Variance Decomposition

Financial Market Linkages in South Asia: Evidence Using a Multivariate GARCH Model

The economic and social benefits of more openness and internationalisation are well supported by both academics and policy-makers. Many countries are also trying to become part of the world trade bloc such as the World Trade Organisation (WTO) or AFTA. Efforts are also made to strengthen the existing regional economic and trade coordination or establish new regional economic and financial integration. Unfortunately, at the time (during the 1980s and 1990s) when many emerging economies in East Asia were involved in openness, internationalisation and regional economic and financial integration, the South Asian countries wasted their resources in dealing with political crisis (such as Bangladesh), internal conflicts (such as Sri Lanka) or border issues (such as India and Pakistan). It is only recently that regimes have realised that a peaceful economic environment is essential to attract foreign investment, pursue a pro-growth policy and achieve a sustainable growth. The recent dialogue between Pakistan and India and some progress in SAARC consultation are a few steps towards these goals

Financial Market Integration in Pakistan: Evidence Using Post-1999 Data

The recent wave of financial sector reforms and internationalisation in emerging markets has increased perceived interlinkages within various sectors of national financial markets. For example, the existence of a strong linkage between stock prices and exchange rates is a popular topic in academic research. Similarly, changes in stock prices and exchange rates are expected to influence movements in interest rates. A number of hypotheses suggest such a causal relationship. For instance, using a goods market approach, any changes in the value of currency would affect the competitiveness of multinational firms and hence influence stock prices [Dornbusch and Fischer (1980)]. Similarly, the hypotheses of ‘exchange rate pass-through’ and ‘interest rate pass-through’ suggest that changes in exchange rates and/or interest rates could affect stock prices. The portfolio balance model suggests that fluctuations in stock prices influence exchange rate changes