Pass-Through of SBP Policy Rate to Market Interest Rates: An Empirical Investigation
AbstractMarket based implementation of monetary policy embeds a swift and complete pass-through of changes in policy rate to market interest rates. This impacts the lending and deposit rates (retail rates) of the banking system. Incomplete and slow pass-through impairs the effectiveness of monetary policy transmission mechanism. This study estimates the degree and the speed of interest rate pass-through in case of Pakistan. Monthly data on State Bank of Pakistan (SBP) policy rate, money market rates and banks’ retail lending/deposit rates from July 2001 to August 2011 is used to estimate an unrestricted autoregressive distributed lag (ARDL) model. The standard ARDL model allows for the estimation of an error correction model, which helps in differentiating short run impact of changes in policy rate from its long run impact on the banks’ lending rates. The results indicate that while there is a swift pass-through from the policy rate (T-bill rates and overnight rate) to money market rate, the impact of changes in money market rates on the bank deposit rates is not only sluggish, but also incomplete. However, banks’ lending rates on fresh loans are more responsive to changes in money market rates as the banks have the luxury to take into account the changes in opportunity cost of funding.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 39587.
Date of creation: 20 Jun 2012
Date of revision:
Policy Interest Rate; Market Interest Rate; Monetary Policy;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-MAC-2012-07-01 (Macroeconomics)
- NEP-MON-2012-07-01 (Monetary Economics)
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