Pakistan Institute of Development Economics



Conducting Monetary Policy in South Asian Economies: AnInvestigation

Monetary policy which until recently aimed at targetingmonetary aggregates has quietly given way to adjusting interest rates.Most of the Central Banks now focus on money reaction function thatdirectly targets inflation or price level. This paper examines the waymonetary policy is being conducted in the four major South Asianeconomies, namely, Bangladesh, India, Pakistan and Sri Lanka. Theanalysis is based on a variant of the Taylor rule framework. Usingquarterly data over the period 1990Q1 to 2012Q4, the study finds thatthe monetary authorities in India, Pakistan and Sri Lanka haveaccommodated some degree of inflationary pressure, whereas Bangladeshhas continuously smoothened interest rate while setting its monetarypolicy. Besides pursuing a mild monetary policy stance againstinflation, India, Pakistan and Sri Lanka are also giving importance toforeign interest rate and real exchange rate movements to justify theirrelevance in monetary policy setting. However, the same has not beenfound to be true for Bangladesh. JEL Classification: E52, E58, E60Keywords: Monetary Policy Rule, Central Banks, SAARCCountries

Muhammad Arshad Khan,

Ather Maqsood Ahmed