Monetary Policy and Exchange Market Pressure in Pakistan

This study analyses the foreign exchange market disequilibrium in Pakistan. A monetary model of exchange market pressure has been developed and estimated using a VAR model. Employing Granger causality and impulse response analysis, it is shown that monetary authorities in Pakistan have only limited control over the domestic money supply and any effort to increase domestic credit will not be successful as it leads to the drainage of foreign reserves and attempts to sterilise the monetary effects of the loss of reserves will be largely ineffective.