The Interest Rate Targeting; A Way Out to Curb Price Instability in Pakistan

Abstract

To attain sustainable economic growth stability in prices is considered as the key instrument. The SBP is considering interest rate targeting as most suitable strategy to control price instability in Pakistan. Present research will make analysis of interest rate targeting in the country. The study empirically investigates long and short run impact of interest rate targeting on inflation. Estimated outcomes of present research indicate the significance of interest rate targeting for the country. Inflation rate is considered as dependent variable. Main proposed variable to influence inflation is interest rate. The controlled variable of present research is real GDP growth. Annual data covering the period from 1980-2019 has been used. The techniques of Autoregressive Distributed Lag Model and pair wise causality approach to assess the nature of causation among variables have been used. The results of the study propose that interest rate is best instrument to achieve target of less volatile prices in economy.