In this study an attempt has been made to develop and estimate the domestic credit policy reaction function to analyse the monetary implications of interventions and sterilisation policy in Pakistan using quarterly data ranging from 1982 Q3 through 2001 Q2. By employing Johansen multivariate cointegration technique, this paper has considered the degree of sterilisation that the Pakistan has used in controlling capital flows. The evidence suggests that Pakistan sterilises around 72 percent of international reserve inflows in the long-run while 88 percent in the short-run during the period of study.
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