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Interest Rate Pass-through in Pakistan: Evidence from Transfer Function Approach

Author

Listed:
  • Abdul Qayyum

    (Pakistan Institute of Development Economics, Islamabad.)

  • Sajawal Khan

    (Government Degree College, Ghasi (NWFP).)

  • Idrees Khawaja

    (Air University, Islamabad.)

Abstract

This paper empirically investigates the pass-through of the changes in the interest rate on Treasury bills in Pakistan to money market rate (call money rate), banks’ deposit rate, and banks’ lending rate. The motivation for the study is that the effectiveness of the monetary policy transmission mechanism hinges upon the speed and extent of the pass-through of the policy rate to the individual elements of the transmission mechanism. Call money rate, banks’ deposit rate, and banks’ lending rate, being important elements of the monetary transmission mechanism, the examination of the pass-through to these rates will shed light on the effectiveness of the monetary transmission mechanism. The results are, by and large, in conformity with the literature on the pass-through: pass-through of the changes in the treasury bill rate tocall money is completed in the impact period, i.e., one month. The pass-through to savings deposit rate starts during the first six months and continues for quite long. In the case of six-months deposit rate and the lending rate, no pass-through is noticed during the first six-months. The pass-through occurs between 1.5-3 years in both the cases.

Suggested Citation

  • Abdul Qayyum & Sajawal Khan & Idrees Khawaja, 2005. "Interest Rate Pass-through in Pakistan: Evidence from Transfer Function Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 44(4), pages 975-1001.
    • Handle: RePEc:pid:journl:v:44:y:2005:i:4:p:975-1001
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shahzad Ahmad & Farooq Pasha, 2015. "A Pragmatic Model for Monetary Policy Analysis I: The Case of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 11, pages 1-42.
    2. Ali Choudhary & Amjad Ali & Shah Hussain & Vasco J. Gabriel, 2012. "Bank Lending and Monetary Shocks: Evidence from a Developing Economy," SBP Working Paper Series 45, State Bank of Pakistan, Research Department.
    3. Hasan Muhammad Mohsin, 2011. "The Impact of Monetary Policy on Lending and Deposit Rates in Pakistan: Panel Data Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 199-213, September.
    4. Sheikh Khurram Fazal & Muhammad Abdus Salam, 2013. "Interest Rate Pass-Through: Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 39-62, Jan-June.
    5. Nadeem Ul Haque & Musleh-ud Din & Lubna Hasan, 2007. "Research at PIDE: Key Messages," PIDE Books, Pakistan Institute of Development Economics, number 2007:2, December.
    6. Rashid Amjad Chaudhry & Musleh ud Din & Abdul Qayyum, 2011. "Pakistan: Breaking Out of Stagflation into Sustained Growth," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 13-30, September.
    7. Hanif, M. Nadim & Khan, Mahmood ul Hassan, 2012. "Pass-Through of SBP Policy Rate to Market Interest Rates: An Empirical Investigation," MPRA Paper 39587, University Library of Munich, Germany.
    8. Mohsin, Hasan Muhammad & Rivers, P, 2011. "Are domestic banks' pass through higher than foreign banks? Empirical evidence from Pakistan," MPRA Paper 33282, University Library of Munich, Germany, revised Apr 2011.
    9. Amjad Ali & M. Ali Choudhary & Shah Hussain & Vasco J. Gabriel, 2012. "Bank Lending and Monetary Shocks: an Empirical Investigation," School of Economics Discussion Papers 0212, School of Economics, University of Surrey.
    10. Muhammad Nadim Hanif & Muhammad Jahanzeb Malik, 2015. "Evaluating the Performance of Inflation Forecasting Models of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 11, pages 43-78.
    11. Muhammad, Omer & de Haan, Jakob & Scholtens, Bert, 2014. "Impact of Interbank Liquidity on Monetary Transmission Mechanism: A Case Study of Pakistan," MPRA Paper 56161, University Library of Munich, Germany.
    12. Heinrich Nel & Tadiwa Mangwengwende & Zivanemoyo Chinzara, 2011. "Bank concentration and the interest rate pass-through in Sub-Saharan African countries," Working Papers 233, Economic Research Southern Africa.
    13. Khan, Mahmood ul Hassan & Hanif, Muhammad Nadim, 2012. "Role of Demand and Supply Shocks in Driving Inflation: A Case Study of Pakistan," MPRA Paper 48884, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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