The relevance and relative robustness of sources of inflation bias in Pakistan

Abstract

We empirically examine the relevance and relative robustness of stabilization and non-stabilization sources of inflation bias for the typical discretionary monetary policy strategy of Pakistan. First, the stabilization and non-stabilization sources of inflation bias are identified, and their proxy variables are constructed. Second, a robustness evaluation strategy is developed based on bivariate and multivariate analysis of cointegrating relationships among inflation bias indicators and potential sources thereof to determine their long-term relevance and relative robustness or fragility. The stabilization sources of inflation bias such as exploitation of the inflation output trade-off for growth stimulation and the central bank’s preference for growth stabilization are the most relevant and relatively robust sources of inflation bias vis-à-vis the non-stabilization sources. Among the non-stabilization sources, only openness is partially relevant but is fragile.