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

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  • Qayyum, Abdul
  • Khan, Sajawal
  • Khawaja, Idrees

Abstract

The influence of monetary policy upon real output and the inflation rate is well established. The influence is exercised through the transmission mechanism of monetary policy. This study has examined the pass-through of Treasury Bill rate to money market rate (Call Money rate), Banks’ Deposit rate and Banks’ Lending rate. The broader conclusion is that pass-through from Treasury Bill rate to Call money rate is completed during the first month. However pass-through from Treasury Bill rate to Deposit rates and the Lending rate takes much longer, that is, these rates exhibit rigidity. The results are in conformity with the empirical evidence in the relevant literature for other countries. In practice, the pass-through to the deposit and the lending rates is expected to be quicker than evidenced in this study. The reason is that the study uses weighted average deposit and lending rate. Given that the weighted average rate takes into account outstanding deposit/loans contracted at previous rates as well, (besides the fresh deposit/loans contracted at new rates) this tends to tone down the pass-through.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2056.

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Date of creation: 2005
Date of revision: 2005
Publication status: Published in The Pakistan Development Review 4.44(2005): pp. 975-1001
Handle: RePEc:pra:mprapa:2056

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Keywords: Monetary policy; Interest Pass through; transmission mechanism; pakistan;

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References

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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Bredin, Don & Fitzpatrick, Trevor & O'Reilly, Gerard, 2001. "Retail Interest Rate Pass-Through: The Irish Experience," Research Technical Papers 6/RT/01, Central Bank of Ireland.
  3. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
  4. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  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.
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Cited by:
  1. Ali Choudhary & Amjad Ali & Shah Hussain & Vasco J Gabriel, 2012. "Bank Lending and Monetary Shocks: Evidence from a Developing Economy," Working Papers id:4771, eSocialSciences.
  2. Amjad Ali & M. Ali Choudhary & Shah Hussain & Vasco J. Gabriel, 2012. "Bank Lending and Monetary Shocks: an Empirical Investigation," School of Economics Discussion Papers, School of Economics, University of Surrey 0212, School of Economics, University of Surrey.
  3. 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.
  4. Amjad, Rashid & Din, Musleh-ud & Qayyum, Abdul, 2011. "Pakistan: Breaking out of stagflation into sustained growth," MPRA Paper 33812, University Library of Munich, Germany.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. T. Mangwengwende & Z. Chinzara & H. Nel, 2011. "Bank concentration and the interest rate pass-through in Sub-Saharan African countries," Working Papers 233, Economic Research Southern Africa.

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