Abstract
We investigated the effectiveness of the monetary policy tools, the discount rate and the reserve requirement ratio, in Pakistan by studying their pass through to the retail interest rates and the exchange rate. We find that the pass-through of the required reserve ratio to the retail rates and exchange rate is significant but incomplete. The pass through of discount rate; to the lending rate is complete; to the deposit rate is incomplete and; to the exchange rate is insignificant. Our results suggest that the required reserve is a more powerful tool for managing the lending rate and stabilizing the exchange rate shocks, than discount rate. We, therefore, recommend central banks to not to ignore the reserve requirement ratio as an active policy tool, specifically when exchange rate is under speculative attack.