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Demand for Bank Lending by the Private Business Sector in Pakistan

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  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad.)

Abstract

This study estimates the demand for bank lending by the private business sector in Pakistan. For the purpose of analysis a three-step methodology is applied, that is, univariate analysis, multivariate cointegration analysis, and error correction mechanism. It is found that the individual series are difference stationary, and there is a long-run stable relationship between the variables. The preferred model, obtained by the application of the general-to-specific methodology is also found to be stable throughout the study period. The study shows that the output of business sector is an important determinant of the demand for bank credit in Pakistan, implying that to achieve the objective of monetary policy the behaviour of the output of business sector must not be ignored. Furthermore, the study shows that the rate of interest on bank advances is an important determinant of the demand of credit by the business sector. It implies that monetary authorities can move the flow of bank credit to the private sector while changing the interest rate charged on bank lending. The analysis has important implications a tight monetary policy implies a high rate of real interest; a high rate of interest on bank lending negatively affects the demand for bank credit by the business sector (and the investment), which in turn leads to low aggregate demand and lower output. That is what has happened in Pakistan in the last decade.

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 41 (2002)
Issue (Month): 2 ()
Pages: 149-159

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Handle: RePEc:pid:journl:v:41:y:2002:i:2:p:149-159

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  1. Mehmood Ul Hassan & Yameen Memon & Abdul Hamid, 1999. "Returns to Facilitating Farmers’ Organisations for Distributary Maintenance: Empirical Results from a Pilot Project in Southern Punjab," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 38(3), pages 253-268.
  2. Hewitson, Gillian, 1997. "The Post-Keynesian 'Demand for Credit' Model," Australian Economic Papers, Wiley Blackwell, vol. 36(68), pages 127-43, June.
  3. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  4. Hendry, David F. & Pagan, Adrian R. & Sargan, J.Denis, 1984. "Dynamic specification," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 18, pages 1023-1100 Elsevier.
  5. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  6. Allsop, Christopher & Vines, David, 2000. "The Assessment: Macroeconomic Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 16(4), pages 1-32, Winter.
  7. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  8. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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Cited by:
  1. Imran, Kashif & Nishat, Mohammed, 2013. "Determinants of bank credit in Pakistan: A supply side approach," Economic Modelling, Elsevier, vol. 35(C), pages 384-390.

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