Abstract:
The objective of this paper is to assess the conditions for inflation
targeting in Pakistan. The recent inflationary surge in Pakistan calls for
rethinking monetary policy afresh. This paper argues the case for inflation
targeting in Pakistan as a policy option to achieve price stability. The country
experienced an inflation rate of just below 10 percent during 1970-2009, which
makes it a potential candidate for inflation targeting. Applying the VAR
technique to data for the same period, inflation is shown to be adaptive in nature,
leading us to reject the accelerationist hypothesis. The Lucas critique holds as
people are found to use forward-looking models in forming expectations about
inflation. The paper also sheds some light on the State Bank of Pakistan’s level of
preparedness for the possibility of adopting inflation targeting, for which
transparency and autonomy are prerequisites. The interest rate channel can play
the role of a nominal anchor in the long run.
