014 - Shuaibi, A. J.

Ahmad Javed Shuaibi:

A Critical Evaluation of Monetary Policy in Afghanistan



Using secondary data from the period 1979-2010, this article reveals that the central bank of Afghanistan (DAB) was not able to control inflation during the period from 1970 to 2001, due to civil war and financing government expenditure through the printing of money. After the establishment of a new government in 2001 the central bank of Afghanistan designed a monetary program with the cooperation of the IMF to fight inflation. The current monetary policy framework of the central bank of Afghanistan is based on targeting monetary aggregates. The central bank of Afghanistan uses foreign exchange action as the main instrument of monetary policy and another new instrument called open market policy by Capital Notes auctions to control liquidity and keep the price stable. Using these instruments, the central bank of Afghanistan has been able to reduce inflation during the period 2001-2010. However, DAB can only control inflation in the long and medium run. This is true in case of the monetarist theory. Although inflation has decreased considerably, the risk of inflation is still high, since there are other external factors such as an increase in the world price for food items and oil as well as other intermediate goods which are unexpected and cannot be controlled by DAB.

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