and have implications for price stability. in the recent past, countries have moved towards inflation targeting regimes. however, such a regime requires that the central bank ’ s policies remain independent of the fiscal authority, have market credibility and are time - consistent. given that conditions in developing countries may not allow for such freedoms, inflation targeting may prove to be ineffective in such economies. indeed, these are interesting times to be an economist ; and in such times, we must occasionally toss conventional prescriptions aside and seek customized solutions. but for that it is necessary to fully understand our individual economies. the greeks may not be going through the best of times right now, but it was a greek philosopher who first advised “ know thyself ”. and, analogous to this, any competent policymaker must know his or her own economy inside out. he must know what makes the economy tick ; how the linkages in the economy interact with each other ; how signals and information gets transmitted through these linkages ; and what each of the knobs and dials on his dashboard does to calibrate the economy. the process of self - discovery is as relevant for the individual as it is for the economy. the process of improving the economy starts after the process of understanding. bis central bankers ’ speeches for instance, monetary policy may be transmitted through a variety of different channels. most commonly, the real interest channel is used to influence aggregate demand and fine - tune the economy. but we must take a step back and ask ourselves : do the linkages hold as strongly in the actual economy as they do in theory, especially given the high level of inflation and the high frequency of price changes that most developing economies face? monetary policy may also be transmitted through the balance sheets of banks and firms. once again, we must know how bank lending and pricing behavior changes in response to changes in the policy rate. then, there ’ s also the exchange rate channel and finally, the expectations channel, which i shall discuss in a bit more detail later. but they key idea here is that a thorough understanding of all these transmission channels is needed in order to calibrate an effective monetary policy framework. know thy economy! allow me to share my understanding regarding the workings of these channels in pakistan. as i pointed our earlier, the real interest channel is extremely weak in times of frequent prices changes and high inflation. a recent survey carried out by the research department revealed that prices are revised roughly every quarter in the economy. coupled with the fact that

if the relationships that we have assumed, while developing our models, still hold. the economy is a living, evolving organism. relationships between variables break down ever so often. this only adds to the excitement of being a policymaker, ladies and gentlemen! the complexity and the uniqueness of our economy only emphasize the need to develop a thorough grass - roots understanding of the economy, and a customized toolbox to deal with the multiples challenges along the way. far too often have we relied on conventional bis central bankers ’ speeches prescriptions without fully understanding the symptoms. i challenge you all to question the assumptions that you have based your frameworks on ; let ’ s take nothing as a given and let ’ s make our policy directives as unique as the economies they target. i ’ m in a room full of central bankers here and it is probably unnecessary to say this, but, at the end of the day and despite our best efforts, even seemingly seamless plans may fail and our policy instruments may let us down. yes, it is tough to map out the behavior of an informal sector that is probably the size of the formal economy ; yes, it is difficult to impose fiscal discipline ; yes, it is almost impossible to control the international prices of fuels and grains ; and yes, our textbooks seem to be clueless when it comes to tackling today ’ s economic problems. but this only underscores the need – no, the necessity – to fully understand the nature of our economies. know thy economy, ladies and gentlemen! and now i invite you all to share your ideas and experiences with the rest of us. tell us about the nature of your economies ; tell us about your toolkits ; and tell us how they have fared with time. i can tell you that we, at the state bank, have come a long way from the days of rationalized credit and strict controls on exchange rate. we have moved towards a better understanding of our economy and we ’ ve made some significant progress towards discovering the impact that our monetary policy has on the real economy. i hope that you will get a chance to share your thoughts with us and lead our minds to previously unexplored territories. the saarcfinance seminar series was meant to facilitate the transfer of ideas and experiences. today, i am excited about what we may learn from each other over the next few days. on that note, ladies and gentlemen, let us share our insights regarding monetary policy frameworks ; and