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Interest Rate Pass-Through: Empirical Evidence from Pakistan

  • Sheikh Khurram Fazal

    ()

    (Mitsubishi Corporation, Karachi, Pakistan.)

  • Muhammad Abdus Salam

    ()

    (State Bank of Pakistan, Karachi, Pakistan.)

Registered author(s):

    This article empirically examines the interest rate pass through mechanism for Pakistan, using six month treasury bills as a proxy for the policy rate (the exogenous variable) and the weighted average lending rate and weighted average deposit rate as endogenous variables representing the lending and deposit channels, respectively. We use data for a six year period from June 2005 to May 2011, published by the central monetary authority in Pakistan. The widely accepted error correction mechanism is used to examine the shortrun and long run pass-through; a vector error correction mechanism impulse response function helps measure the short run speed of the pass-through. We find that there is an incomplete pass-through in Pakistan for both the lending and deposit channels. The impact is greater on the lending channel than on the deposit channel in both the short and long run, while the adjustment speed is higher for the lending channel.

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    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 18 (2013)
    Issue (Month): 1 (Jan-June)
    Pages: 39-62

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    Handle: RePEc:lje:journl:v:18:y:2013:i:1:p:39-62
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    1. Marco A. Espinosa-Vega & Alessandro Rebucci, 2004. "Retail Bank Interest Rate Pass-through: Is Chile Atypical?," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Antonio Ahumada & J. Rodrigo Fuentes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking Market Structure and Monetary Policy, edition 1, volume 7, chapter 5, pages 147-182 Central Bank of Chile.
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    16. Alexander F. Tieman, 2004. "Interest Rate Pass-Through in Romania and Other Central European Economies," IMF Working Papers 04/211, International Monetary Fund.
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