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Interest Rate Pass-Through: Empirical Evidence from Pakistan

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Author Info

  • Sheikh Khurram Fazal

    ()
    (Mitsubishi Corporation, Karachi, Pakistan.)

  • Muhammad Abdus Salam

    ()
    (State Bank of Pakistan, Karachi, Pakistan.)

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    Abstract

    This article empirically examines the interest rate pass through mechanism for Pakistan, using six month treasury bills as a proxy for the policy rate (the exogenous variable) and the weighted average lending rate and weighted average deposit rate as endogenous variables representing the lending and deposit channels, respectively. We use data for a six year period from June 2005 to May 2011, published by the central monetary authority in Pakistan. The widely accepted error correction mechanism is used to examine the shortrun and long run pass-through; a vector error correction mechanism impulse response function helps measure the short run speed of the pass-through. We find that there is an incomplete pass-through in Pakistan for both the lending and deposit channels. The impact is greater on the lending channel than on the deposit channel in both the short and long run, while the adjustment speed is higher for the lending channel.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 18 (2013)
    Issue (Month): 1 (Jan-June)
    Pages: 39-62

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    Handle: RePEc:lje:journl:v:18:y:2013:i:1:p:39-62

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    Related research

    Keywords: Interest rate pass-through; interest rate channel; transmission mechanism; monetary policy; Pakistan.;

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    1. Idrees Khawaja & Musleh-ud Din, 2007. "Determinants of Interest Spread in Pakistan," PIDE-Working Papers 2007:22, Pakistan Institute of Development Economics.
    2. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
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    8. Brooks,Chris, 2008. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9780521694681, November.
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    11. Qayyum, Abdul & Khan, Sajawal & Khawaja, Idrees, 2005. "Interest Rate Pass-through in Pakistan: Evidence from Transfer Function Approach," MPRA Paper 2056, University Library of Munich, Germany, revised 2005.
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    13. Rodolfo Maino & Balázs Horváth, 2006. "Monetary Transmission Mechanisms in Belarus," IMF Working Papers 06/246, International Monetary Fund.
    14. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    15. Halil Ibrahim Aydin, 2007. "Interest Rate Pass-Through in Turkey," Working Papers 0705, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    16. Alexander F. Tieman, 2004. "Interest Rate Pass-Through in Romania and other Central European Economies," IMF Working Papers 04/211, International Monetary Fund.
    17. Akyurek, Cem & Kutan, Ali M. & Yilmazkuday, Hakan, 2011. "Can inflation targeting regimes be effective in developing countries? The Turkish experience," Journal of Asian Economics, Elsevier, vol. 22(5), pages 343-355, October.
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