Forward-Looking and Backward-Looking Taylor Rules Evidence from Pakistan

Abstract

This study uses the forward-looking rule and backward-looking Taylor rule to investigate the conduct of monetary policy in Pakistan during 1971–2011. We compare the pre- and post-reform periods, and find that the estimates obtained using the generalized method of moments indicate that no interest rate rule was being followed. This explains the inability of monetary policy to control inflation and minimize the output gap. Although monetary policy was not very active in the pre- and post-reform periods, the post-reform quarterly data show some interest rate inertia and smoothing. Monetary policy was less accommodating of the cyclical nature of the output gap. We conclude that the behavior of the State Bank of Pakistan was not very different under forward- or backward-looking rules.