The objective of this paper is to estimate
monetary policy reaction function. For this purpose, Taylor type rules and McCallum rules are estimated using quarterly data of Pakistan economy over the period 1993 Q3 to 2013 Q2.
Following Taylor (1993), the baseline
monetary policy reaction function can be written as follows:
In jargon, if the
monetary policy reaction function does not incorporate financial imbalances, the monetary anchor may fail to deliver financial stability."
In these simulations we assume that financial markets, including the
monetary policy reaction function, are forward looking.
We extend Romer and Romer 's (2004) analysis of the estimation and the effects of monetary policy shocks by controlling for (1) changes in the
monetary policy reaction function and (2) changes in the response of output and prices over time with an extended data set.
The
monetary policy reaction function, which measures how the monetary policy instruments react to the information available to the central bank about the state of the economy, adequately represents the central bank's behaviors.
The paper also includes survey-based inflation expectations in the Chinese
monetary policy reaction function. Using business surveys to evaluate the relevance of including forward-looking elements in the estimated equations produces evidence of stabilising policy in terms of inflation.
Equation (8) is a
monetary policy reaction function, and equation (9) shows how house prices depend on the short rate and a shock.
In particular, they illustrate variations in the parameters describing the
monetary policy reaction function and in the parameters characterizing the pricing behavior of firms and households.
A monetary policy disturbance arises from an action by the monetary authority that deviates from the model-specified
monetary policy reaction function, which identifies and distinguishes between money supply and money demand.
Accordingly, the dynamics of the alternative
monetary policy reaction function are given by