MONETARY POLICY AND INFLATION Is Monetary policy significant? Impact of Monetary policy on Inflation

Abstract

Pakistan is in an economic crisis, owing to a slowdown in the world economy for a good two years. One major issue Pakistan is dealing with is that of rising price levels. State Bank of Pakistan (SBP) is taking several measures to curb this growing inflation. Monetary policy enforced by SBP now will primarily be dependent on the trend in inflation i.e, focussed on curtailing inflation in the future. The tools of Monetary policy under SBP’s control include discount rate, cash reserve requirement ratio (CRR) and open market operations. Using these tools SBP is not only controlling the supply of funds but also the availability of money and the cost of money, in line with achieving a certain set of goals related to economic stability and growth, to be specific, lower inflation. In the process of studying the current monetary policy i.e, measures taken by SBP to curtail inflation, monthly data was obtained on CPI index, discount rate, CRR and 3-month T-bill rate for 4 years. This data was then graphically represented to analyse the trend. In addition to that, the data was also regressed so as to develop proper models. The data analysis clearly indicates the extent to which each tool’s use was focussed on controlling inflation and bringing it back to normal levels