Yes, we need a central bank

The financial system of a country comprises entities engaged in transactions involving financial instruments in money, capital, and foreign exchange markets. This sector has strong linkages with other sectors of the economy like external, fiscal and real sectors. The apex financial institution in every country is its Central Bank and the State Bank of Pakistan functions as our Central Bank. Section 9A. 1. of the State Bank of Pakistan Act 1956 shoulders the function of securing the soundness of the financial system explicitly upon the Central Board of Directors of the Bank. Traditionally, it has been considered ideal to place banking supervision under the umbrella of Central Bank because this function is key to the conduct of monetary policy and financial stability oversight. Financial sector reforms and restructuring process started in the early 1990s. Objectives of reforms were to create a level playing field for financial institutions and markets for instilling competition, strengthening their governance and supervision, and adopting a market-based indirect system of monetary, exchange and credit management for better allocation of financial resources. Reforms covered seven important areas: financial liberalisation, institutional strengthening, domestic debt management, monetary management, banking law, foreign exchange, and capital market.Central bank

Estimating Standard Error of Inflation Rate in Pakistan: A Stochastic Approach

“The answer to the question what is the mean of a given set of magnitudes cannot in general be found, unless there is given also the object for the sake of which a mean value is required. There are as many kinds of average as many purposes; and we may almost say in the matter of prices as many purposes as many writers.” Edgeworth (1888). We estimate standard errors (S.Es.) of month on month and year on year inflation in Pakistan based on data for the period of July 2001 to June 2010 using the stochastic approach as well as extended stochastic approach to index numbers. We develop a mechanism to estimate S.E. of period average headline inflation (rate) using these approaches. This mechanism is then applied to estimate S.Es. of 12-month average rate of inflation in Pakistan for July 2003 to June 2010. The systematic changes in the relative prices of different groups in the CPI basket for Pakistan are also estimated. The highest (positive) relative price inflation occurred in ‘food, beverages and tobacco’ group and the lowest (negative) for ‘recreation and entertainment’ group, during fiscal years 2001 to 2010. JEL classification: C13, C43, E31 Keywords: Estimation, Index Numbers, Inflation Rate, Standard Erro

Assessing the Role of Money versus Interest Rate in Pakistan

We have empirically examined the role of monetary aggregate(s) vis-à-vis short-term interest rate as monetary policy instruments, and the impact of State Bank of Pakistan’s transformation into the latter on their relative effectiveness in terms of inflation in Pakistan. Using indicators of ‘persistent changes’ in the underlying behaviours of variables of interest, we found that broad money consistently explains inflation in (i) monetary (ii) transitory and (iii) interest rate regimes. Though its role has receded while moving from the transition to the interest rate regime, the interest rate instrument seems to be positively related to inflation, a phenomenon commonly known as price puzzle. In light of these findings, we recommend that the role of money should not be completely de-emphasised. JEL Classification: E31, E52. Keywords: Monetary Policy Instruments, Price Puzzle, ARDL, Pakista

SUSTAINABLE GROWTH OF NONFINANCIAL FIRMS: MICROECONOMETRIC EVIDENCE FROM PAKISTAN

This research has investigated the sustainability of growth of nonfinancialfirms in case of Pakistan. For this purpose, explanatoryvariable of earnings per share and total assets turnover were used ascontrolling factors and liquidity, size and cash flows were used asindependent variables. Balanced panel of 27 firms with 24 annualtime dimensions has been used from 1988 to 2011. Model specificationcriteria were in favour of pooled least squares but due to heterogeneityof firms, fixed effect model was opted for. The results of research wererobust against internal growth but not robust to sustainable growthindicating that, in case of Pakistan, the leverage impact, which is thekey difference between internal growth and sustainable growth mightbe playing some unexplained role for the growth of nonfinancial firms.For steady, regular and internal growth, liquidity and cash generationability are playing a significant role but fail to support growth in thelong run and in a sustainable way

The size of informal economy in Pakistan

This paper estimates the size of informal economy in Pakistan by using monetary approach with some modifications, electricity consumption approach and MIMIC model. Under monetary approach, we take care of the issue of the stationarity of variables and use autoregressive distributed lag (ARDL) model instead of simple OLS and add education as an additional factor affecting the size of informal economy along with some other technical improvements in the standard monetary models. The electricity consumption approach and MIMIC models are used for the first time in case of Pakistan. The results show that the informal economy in Pakistan has been about 30 percent of the total economy which declined considerably in 2000s. Currently, about 20 percent of the economic transactions are taking place in the informal sector.Informal Economy, ARDL, MIMIC

Procyclical Monetary Policy and Governance

Weak governance adversely affects firm’s net worth and consequently the value of its collateral. This negative impact on the collateral reduces the external credit available for importing inputs constraining potential output. As a result, a stronger procyclical monetary policy stance is adopted for protecting the exchange rate and hence arresting the degradation in the collateral constraint.Collateral Constraints; Governance; Monetary Policy

Monetary Policy Experience of Pakistan

Using monetary policy rate and/or changes in certain liquidity ratios, State Bank of Pakistan influences cost and/or availability of money and credit in the country to achieve (government announced) inflation target without being prejudice to real economic growth target. Earlier, SBP had been following monetary aggregate targeting to achieve its objectives. Reserve money had been used as an operational target. After weakening of broad money growth and inflation relation (as a result of financial sector reforms and restructuring), SBP transferred the operational target to the overnight money market repo rate. Various monetary conditions indicators are used to decide on the direction and magnitude of monetary policy stance. Budget deficit (with its financing mix), money supply (with its composition), local currency prices of imported goods, wheat support price, and expected (higher) inflation play an significant role in generating inflation while real income growth, and (international trade) openness help dampening it. Inflation in Pakistan has been found equals to rate of broad money growth minus the real output growth which simply shows inflation in Pakistan has mainly been a monetary phenomenon. Monetary policy has provided stable background for the economy as we saw standard deviations for inflation and broad money growth to be same during 1951-2010. Financial sector reforms and restructuring (after end 1980s) helped lower the (broad money growth and) inflation volatility in the country

Yes, we need a central bank

The financial system of a country comprises entities engaged in transactions involving financial instruments in money, capital, and foreign exchange markets. This sector has strong linkages with other sectors of the economy like external, fiscal and real sectors. The apex financial institution in every country is its Central Bank and the State Bank of Pakistan functions as our Central Bank. Section 9A. 1. of the State Bank of Pakistan Act 1956 shoulders the function of securing the soundness of the financial system explicitly upon the Central Board of Directors of the Bank. Traditionally, it has been considered ideal to place banking supervision under the umbrella of Central Bank because this function is key to the conduct of monetary policy and financial stability oversight. Financial sector reforms and restructuring process started in the early 1990s. Objectives of reforms were to create a level playing field for financial institutions and markets for instilling competition, strengthening their governance and supervision, and adopting a market-based indirect system of monetary, exchange and credit management for better allocation of financial resources. Reforms covered seven important areas: financial liberalisation, institutional strengthening, domestic debt management, monetary management, banking law, foreign exchange, and capital market

A Note on Food Inflation in Pakistan

Food inflation hurts poor more than rich as poor spend higher proportion of their income on food items compared to rich. Higher global food and crude oil prices in 2008 resulted in higher (than historical average) food inflation in Pakistan. Global food inflation caused food inflation in Pakistan. However, food inflation diffusion has been lower compared to non-food inflation in Pakistan. Food inflation volatility in Pakistan was found to be half of that observed in the world. Compared to global food inflation persistence, there is no evidence of food inflation persistence in Pakistan. However, within the food group, most of the goods which were manufactured exhibited inflation persistence. With the help of comparison of food inflation with wage increases for labour (after 2008 global commodity prices shock), the poor (labour class) was found to be at disadvantage

A Note on Food Inflation in Pakistan

Food inflation hurts poor more than rich as poor spend higher proportion of their income on food items compared to rich. Higher global food and crude oil prices in 2008 resulted in higher (than historical average) food inflation in Pakistan. Global food inflation caused food inflation in Pakistan. However, food inflation diffusion has been lower compared to non-food inflation in Pakistan. Food inflation volatility in Pakistan was found to be half of that observed in the world. Compared to global food inflation persistence, there is no evidence of food inflation persistence in Pakistan. However, within the food group, most of the goods which were manufactured exhibited inflation persistence. With the help of comparison of food inflation with wage increases for labour (after 2008 global commodity prices shock), the poor (labour class) was found to be at disadvantage