Effect of Interest Rate and Cash Reserve Ration on Inflation

AN IMAPCT OF INTEREST RATE AND CRR ON INLFATION

A CASE STUDY OF PAKISTAN

ANUM SHAH (3367)

TABLE OF CONTENT

1. Abstract………………………………………………………………………………………..3

2. Introduction……………………………………………………………………………………4

3. Literature Review ……………………………………………………………………………..5

3.1 Theoretical Background

3.2 Empirical Studies

4. Modeling Framework…………………………………………………………………………..6

5. Estimation And Result………………………………………………………………………….7

6. Conclusion………………………………………………………………………………...……7

7. Policy Recommendations……………………………………………………………… …….8

8. References………………………………………………………………………………… ….9

ABSTRACT

The paper examines the rising inflation in our economy and the impact of interest rate and CRR on the inflation. after analysis of data its is revealed that there is a high but negative relationship between inflation and interest rate. Here we try to find the minor factors which influence the inflation like CRR . in Pakistan only interest rate is used to control inflation but so far we failed to achieve the required result. So other than interest rate factors like CRR, Open Market Operation, liquidity ratio, credit rationing etc. must be considered while taking any measures to control inflation. To see, analyze and control the inflation in more diverse prospect is required rather than depending on only one factor.

2.Introduction

Recent financial crises in Pakistan have made painfully evident that it is highly vulnerable to external shocks and to domestic political instability. The combination of these factors makes life very hard for the policymaker since the effectiveness of economic policies relies very heavily on credibility of policy announcements. This applies with special emphasis to monetary policy.

A Monetary Policy Statement is widely perceived as a pre-emptive move by the central bank. It could either be quantitative or qualitative for easing or tightening purposes by effectively using cash reserve ratio (CRR) and interest rates.

The...