Central bankers of Saarc countries should fully understand the nature of their economies and go beyond textbook approaches to tackle today's economic problems, a handout quoted Governor of the State Bank of Pakistan Yaseen Anwar as saying on Thursday.
He was inaugurating the three-day SaarcFinance - a regional seminar on 'Monetary Policy Frameworks in the SAARC Region' - at the National Institute of Banking and Finance (Nibaf) in Islamabad.
The SBP governor urged participants to check the validity of basic assumptions while developing economic forecast models in view of the possibility of a breakdown in relationships between key variables in the backdrop of emerging economic realities.
"We also need to keep a close watch on the pulse of the economy, considering it is a living and ever evolving organism," the press release quoted him as saying. Anwar said that a comprehensive understanding of the economy was necessary to correctly calibrate monetary policy, which "may then achieve objectives of price stability and economic growth".
Anwar said that sharing ideas and experiences at a regional forum would help central bankers better understand the nature of their economies. He urged them to explore ways by which monetary policy frameworks "may be improved through mutual and collaborative efforts".
The SBP Governor said that targets set by central banks had an effect on real economy and implications for price stability. However, central banks' policies "are more effective when they are independent of fiscal influence and have market freedom and are time-consistent," he said.
"Tabsence of these conditions may reduce the efficacy of their (central banks') policies. The complexities of today's world have created challenges for monetary policy and we must occasionally toss conventional prescriptions aside and seek customised solutions," he said.
Sharing his understanding on the working of various channels of monetary policy, Anwar said that the real interest rate channel in Pakistan was found to be extremely weak during times of frequent price changes and high inflation. Citing a recent study compiled by SBP's Research Department, he said that prices were revised roughly every quarter in the economy. "Coupled with the fact that Pakistan's economy has experienced double-digit inflation during the last four years, prices are very quick to adjust to changes in monetary policy," he said.
"A large part of inflation persistence in the country is due to sustained period of high inflation, which has allowed inflationary expectations to incubate." Anwar pointed out that the lending channel appeared to be quite robust and was the key channel through which monetary policy was transmitted to the real economy in Pakistan. Similarly, the role of exchange rate channel had also gained importance over time because of liberalisation of the foreign exchange market in the country. "SBP monitors the forex market very closely while considering the impact of changes in the exchange rate," he added.
He observed that monetary policy may also influence inflation through expectations channel. The SBP governor said that the transition from understanding these channels to developing proper mechanisms to impact "our objectives may not be smooth". "After all, we should concede that there are some things that we have absolutely no control over in the short-run," he said, adding that policy-making had become a difficult task in recent times.
He observed that the complexity and the uniqueness of "our economy only emphasise the need to develop a thorough grass-root understanding of the economy, and a customised toolbox to deal with the multiple challenges along the way. "We have moved towards a better understanding of our economy and we've made some significant progress towards discovering the impact that our monetary policy has on the real economy," Anwar added.-PR
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