Degree

Master of Science in Economics

Faculty / School

School of Economics and Social Sciences (SESS)

Department

Department of Economics

Date of Submission

2025-10-21

Supervisor

Dr. Faiz Ur Rehman | Prof. Dr. Leef H. Dierks

Project Type

MSECO Research Project

Access Type

Restricted Access

Keywords

State Bank of Pakistan, Nonstandard Monetary Policy, Quantitative Easing, Asset Purchase Programs, Forward Guidance

JEL Code

E52, E58, E31, E61, E44

Abstract

In fulfilment of its mandate, i.e., in maintaining price stability (defined as an inflation rate of 5% to 7% p.a.), the State Bank of Pakistan (SBP) implements various standard monetary policy instruments. The efficiency of the SBP’s monetary policy depends on the functioning of the respective transmission channels, e.g., the credit channel, interest rate channel, exchange rate channel and money supply channel etc. As experience from the 2008-2009 Global Financial Crisis (GFC) illustrates, however, the proper functioning of these transmission channels might be flawed. Among the potential reasons are demand and supply side considerations. Even more notably, perhaps is the so-called liquidity trap, i.e., a situation in which (nominal) main refinancing rates have reached the zero lower bound (ZLB) without any measurable impact on financial markets and the real economy. Further, time lags of c. 6 to 8 months limit a monetary policy’s efficiency. Even though this is not the case at the time of writing, the (efficiency of one or more) transmission channels of monetary policy might encounter shortcomings in Pakistan, too. These could arise from the economy entering into a deflationary period, for example. In an attempt to provide a blueprint for a potential reaction to any such (admittedly, currently less likely) future developments, this research identifies and examines nonstandard monetary policy instruments designed to maintain price stability in any such scenario. Based on a thorough revision of the existing literature, the first step comprises an organized approach for controlling inflation by analyzing global best practices in relation to nonstandard monetary policy such as that of the Federal Reserve System (FED), the Bank of England (BoE), the Reserve Bank of New Zealand (RBNZ), the Bank of Japan (BoJ) and the European Central Bank (ECB). Nonstandard monetary policy instruments like Quantitative Easing (QE) via asset purchase programs (APP), and Forward Guidance are presented as a possible solution to maintaining price stability during a period of crisis i.e., deflation (or disinflation). The findings of this research provide a plausible strategy for controlling inflation by means of identified nonstandard monetary policy instruments and will act as a roadmap for policymakers once a standard monetary policy no longer functions properly during a deflationary (or disinflationary) period when actual inflation falls below target inflation in Pakistan.

Pages

x, 47

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