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The Dominant Borrower Syndrome: The Case of Pakistan

Author

Listed:
  • Sajawal Khan

    (State Bank of Pakistan)

  • Farooq Pasha

    (State Bank of Pakistan)

  • Muhammad Rehman

    (State Bank of Pakistan)

  • Muhammad Ali Choudhary

    (State Bank of Pakistan)

Abstract

In this paper, we analyse the pressure fiscal expansion exerts on the economy via credit markets in Pakistan. We extend Melina and Villa (2014) by allowing government to compete with the private borrowers (firms) for the bank credit in monopolistically competitive banking industry to the extent that it can come to dominate banks balance-sheets, a feature observed in Pakistan following 2008 Global Financial Crisis. Our DSGE model captures the counter cyclical behavior of government borrowings that leads to counter cyclical spreads in loans market. Furthermore, we also find that consumption tax is the preferable policy instrument to address the fiscal deficit in bad times rather than resorting to the dominant borrower behaviour.

Suggested Citation

  • Sajawal Khan & Farooq Pasha & Muhammad Rehman & Muhammad Ali Choudhary, 2016. "The Dominant Borrower Syndrome: The Case of Pakistan," SBP Working Paper Series 77, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:77
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    File URL: http://www.sbp.org.pk/publications/wpapers/2016/wp77.pdf
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    Cited by:

    1. Abdul Jalil, 2021. "Austerity: Which Way Now?," PIDE Knowledge Brief 2021:21, Pakistan Institute of Development Economics.

    More about this item

    Keywords

    DSGE; Commercial Banks; Government Borrowing; Business Cycles; Emerging Economies;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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