Impact of Capital Movements on Sterilization and Monetary Policies in Pakistan: Evidence from Multiple Specifications

This paper aims at evaluating the effectiveness of central bank of Pakistan’s sterilization policy to neutralize the impact of capital movements on domestic monetary conditions. We also estimate how the sterilization efforts are frustrated/offset by fresh capital inflows. Sterilization coefficient and offset coefficients are estimated through Monetary Policy Reaction Function and Capital Flow Equation respectively. To check robustness of our results, we apply three different econometric techniques including Vector Error Correction Method, Two Staged Least Squares and Generalized Method of Moments. Using monthly data, we use one full sample: from 1982M1 to 2018M12 and two subsamples: i.e. from 1982M1 to 2001M09 and from 2001M10 to 2018M12. The results from the two equations from all specifications show that sterilization coefficients are relatively smaller than the offset coefficients implying that it is difficult for Pakistan to sterilize the impact of foreign capital inflows on domestic money base. Larger offset coefficients, on the other hand, particularly for the second subsample, indicate that Pakistan cannot conduct independent monetary policy under the free float exchange rate regime adopted in 2000. Our results from both equations are robust to all specifications and for all samples and subsamples. Major implication of our finding is that Pakistan cannot conduct independent monetary policy in after resorting to free float exchange rate regime.

The Time-Variant Sources of Inflation and Inflation Volatility and Their Interrelations and Effects on Macroeconomic Fluctuations: Evidence from Indonesia and Thailand

Indonesia and Thailand, two major open economies in Southeast Asia which operate under ‘managed-float’ exchange rate systems, have remained susceptible to both the external and domestic shocks since the East-Asian financial crisis of the late 1990s. Unlike the standard monetary-policy literature, these countries have introduced ‘flexible inflation targeting’ as the monetary policy strategy under managed-float exchange rate systems. Although these countries have managed to keep inflation low on average in a low-inflation environment, inflation has however remained highly volatile. This paper attempts to answer how significant are external shocks, relative to domestic shocks, as the drivers of inflation and inflation volatility for these countries? The paper uses a Structural Vector Autoregression (SVAR) modelling framework and monthly macroeconomic data over the period 2000M1-2015M12. The empirical results suggest that in both countries, (i) inflation is more sensitive to external shocks relative to domestic shocks, which is consistent with the inflation globalization hypothesis; (ii) Inflation volatility however remains sensitive to both the external and domestic shocks; (iii) As expected, inflation and inflation volatility exhibit a feedback relation between them, which is consistent with the Friedman‐Ball and Cukierman‐Meltzer propositions. The paper also highlights that inflation and inflation volatility affect the real interest and exchange rates, which affect real output and asset prices. The paper concludes that Indonesia and Thailand can make monetary policy more effective for maintaining price stability if they make the exchange rates more flexible to ameliorate the effects of external shocks on these economies

THE INFLUENCE OF OIL PRICES ON INDONESIA’S EXCHANGE RATE

This study tests for a long-run relation between oil prices and the rupiah–US dollarexchange rate. We discover, first, that the long-run cointegration relation between oilprices and the real exchange rate (RER) is sensitive to different exchange rate regimesin Indonesia. Second, we find a long-run cointegrating relation between oil prices andthe RER over the float exchange rate regime. However, in the managed float period,there is no evidence of a long-run relation between oil prices and the RER. In the longrun, higher oil prices lead to an appreciation of the rupiah against the US dollar in thefloat period (post-August 1997 period). We demonstrate that these results are robust todifferent data frequencies.

Fear of Free Floating or Forced Exchange Rate Fixing

After the financial crisis at the end of the 1990 s many countries rejected fixed exchange rate policy. However actually they failed to proceed to announced "independent float" exchange rate arrangement. This might be due to the "fear of floating" or an irreversible result of inflation targeting central bank policy. In the article advantages and drawbacks of fixed and floating exchange rate arrangements are systematized. Features of new returning to exchange rates stabilization and possible risks of such policy for Russia are considered. Special attention is paid to the issue of choice of a "target" currency composite which can minimize external inflation pass-through.

PERBEDAAN MANAGED FLOAT EXCHANGE RATE SYSTEM DAN FREELY FLOATING EXCHANGE RATE SYSTEM DI INDONESIA

Consequence of the freely floating system and freely foreign exchange system, rupiah could he easily fluctuated, because exchange rate shift not in response but as governed by the interaction between supply and demand in the money markets. The supply and demand forces are influenced by the relative interest rate and relative of inflation. Thus this study examine whether there is a difference of magnitude in the influence of the relative interest rate and relative rate of inflation to the USD - IRD exchange rate when Indonesia adopts respectively the managed float exchange rate system and the freely floating exchange rate system. The finding shows at the level of confidence 95%, that there is no significant difference in the influence of the relative interest rate and relative rate of inflation to the USD - IRD exchange rates between both systems.