Output Gap Measures For Pakistan: Methodoligies And Challenges For The Monetary Policy

This study estimates the output gaps for Pakistan, using both the statistical and the structural methods and comparing their results. Though they show some degree of association, the measures reveal inherent differences in the measures of output gap. Based on the annual data of GDP (1951-2007) for Pakistan the output gap reflects that Pakistan economy has been observing cyclical episodes of excess supply followed by excess demand in the period of analysis. Furthermore, evidence suggests that Pakistan economy is currently experiencing rising demand pressures since FY05. The study is also extended to the use of output gap in a simple Taylor equation to have a glance of the monetary policy. Examining the data for various scenarios the results indicate that the central bank has over most of the time adopted an accommodative monetary policy not following Taylor's rule but a policy where besides inflation other objectives including the output growth was also taken into consideration.