Taylor Rule and the Macroeconomic Performance in Pakistan

Abstract

A near-consensus position in modern macroeconomics is that policy rules have greater advantage over discretion in improving economic performance. For developing countries in particular, simple instrument rules appear to be feasible options as pre-requisites since more sophisticated targeting rules are generally lacking. Using Pakistan’s data, this study has attempted to estimate the Taylor rule and use it as monetary policy strategy to simulate the economy. Our results indicate that the State Bank of Pakistan (SBP) has not been following the Taylor rule. In fact, the actual policy has been an extreme deviation from it. On the other hand, counterfactual simulation confirms that macroeconomic performance could have been better in terms of stability of inflation and output, had the Taylor rule been adopted as monetary policy strategy. The study also establishes that further gains are possible if the parameter values of the rule are slightly modified. JEL classification: E47, E31, E52 Keywords: Taylor Rule, Macroeconomic Performance, Counterfactual Simulation

Monetary policy decisions in selected Organization of Petroleum Exporting Countries economies: does Taylor's principle matter?

“…In addition, none of the Taylor model versions supports the Taylor principles of more than one inflation coefficient. This implies that the principle is not applied in these economies, as in line with the findings of previous studies (see Malik and Ahmed, ; Almounsor, ). It is also interesting to note that at present, Indonesia and Nigeria are considered as inflation‐targeting economies, while Saudi Arabia and Venezuela belong to non‐inflation‐targeting economies.…”

Monetary Policy in Saudi Arabia: A Taylor-Rule Analysis

“…Many researchers, following Taylor (1993) have used the rule to assess monetary policy stances and estimate the reaction function of the interest rate in both advanced economies and EMEs. Malik and Ahmed (2010) have estimated the Taylor rule for Pakistan and compared it to actual historical levels of interest rate during 1991-2005. In addition, they have undertaken counterfactual simulation to investigate whether following the Taylor rule would have improved macroeconomic performance in Pakistan.…”

Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm

“…The preceding line analysis omits the important issue of potential growth over time and the gap between potential and actual GDP growth. Some interesting but controversial work has been carried out at PIDE in the last couple of years (see, for instance, Ahmed, 2010;Malik, 2007;Nasir & Malik, 2011). Although these studies are not conclusive, they seem to persistently suggest that macroeconomic policy has had less success in attaining the economy's output potential in the last 15 years (this is discussed later in the analysis of inflation).…”

“…where i is the short-term policy rate, y is potential output, and π is the inflation rate. Malik and Ahmed (2010) are probably the first to examine the rationale for applying the Taylor rule to Pakistan, and estimating it for the period 1991-2005 as well as for subsamples of different governors' regimes during that period. They find no evidence that the SBP has ever followed this type of rule.…”