Combating Covid-19 through Policy Rate management
Journal Title: Pakistan Journal of Economic Studies - Year 2021, Vol 4, Issue 1
Abstract
The markup on domestic debt is single largest source of expenditures in the federal budget of Pakistan for last few years. These markup payments are determined by the policy rate which is decided by the Central Bank’s monetary policy Committee. Lower policy rate leads to reduction in markup payments, thereby increasing the fiscal space which is necessary needed to manage a package for the relief and rehabilitation of the people affected by Covid-19. However, the State Bank of Pakistan is reluctant to cut down the policy rate due to fear of rise in inflation. This is despite the fact that some of very highly influential studies such as Gibson (1923) and Sims (1992) have found that the high policy rate is associated with high inflation. This paper shows that contrary to the assumption of State Bank of Pakistan and other central banks the higher policy rate is a cause of high inflation, not a cure. The paper shows that contrary to the common literature, the positive association between policy rate and inflation is supported by one of the oldest theory in monetary economics i.e. Tooke’s Banking School theory. Therefore, the paper shows that policy rate can be reduced without the fear of inflation to create a huge fiscal space and an enabling environment for the business which is necessary to deal with the effects of Covid-19 pandemic.
Authors and Affiliations
Atiq ur-Rehman, Ghulam Yahya Khan, Saud Ahmed Khan
Keywords
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