Conducting Monetary Policy in South Asian Economies: An Investigation

Muhammad Arshad Khan, Ather Maqsood Ahmed


Monetary policy which until recently aimed at targeting
monetary aggregates has quietly given way to adjusting interest rates.
Most of the Central Banks now focus on money reaction function that
directly targets inflation or price level. This paper examines the way
monetary policy is being conducted in the four major South Asian
economies, namely, Bangladesh, India, Pakistan and Sri Lanka. The
analysis is based on a variant of the Taylor rule framework. Using
quarterly data over the period 1990Q1 to 2012Q4, the study finds that
the monetary authorities in India, Pakistan and Sri Lanka have
accommodated some degree of inflationary pressure, whereas Bangladesh
has continuously smoothened interest rate while setting its monetary
policy. Besides pursuing a mild monetary policy stance against
inflation, India, Pakistan and Sri Lanka are also giving importance to
foreign interest rate and real exchange rate movements to justify their
relevance in monetary policy setting. However, the same has not been
found to be true for Bangladesh. JEL Classification: E52, E58, E60
Keywords: Monetary Policy Rule, Central Banks, SAARC

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