Examining the Influence of State Bank of Pakistan's Autonomy on Macroeconomic Stability: A Comprehensive Analysis of Pre and Post-Autonomy Periods

Abstract

The study examines the effect of the autonomy of the State Bank of Pakistan (SBP) on its macroeconomic stability. Using data from 1972 to 1993 (as a pre-autonomy era) and 1994-2022 (as a post-autonomy era), the pre and post-autonomy analysis and Autoregressive Distributive Lag Model (ARDL) are utilized to conduct a comprehensive analysis of the relationship between these variables. The study used inflation volatility (as a proxy to measure the macroeconomic stability) as a dependent variable while the independent variables are eight different indices of central bank independence (CBI), democracy, gross domestic product per capita, trade openness, exchange rate volatility, and interest rate. By examining the pre and post-analysis, the study concluded that during the pre-autonomy era, on average the inflation rate (price stability) was about 6%, on the other hand, in the post-autonomy era, the average inflation was about 4%. It means price stability exists in the economy after the autonomy of the State Bank of Pakistan. Likewise, under the pre-autonomy regime, the maximum inflation rate is 15.48%. By contrast, under the post-autonomy regime, the maximum inflation rate is 14.03%, which is below the inflation rate under the pre-autonomy regime. Based on the ARDL technique, the study found that CBI, trade openness, and interest rate have a negative relationship with inflation volatility. In contrast, democracy, gross domestic product per capita, and exchange rate volatility have a positive effect on inflation volatility. The study recommends that the government should promote higher CBI levels.