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Bank Lending and Monetary Shocks: Evidence from a Developing Economy

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  • M. Ali Choudhary

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  • Amjad Ali
  • Shah Hussain
  • Vasco J Gabriel

Abstract

This paper investigates the role of credit market frictions in the transmission of monetary shocks in Pakistan. First, using macro data, it is shown that banking spreads are countercyclical, even it is controlled for credit risk, monetary policy and potential maturity mismatches. It is found that this anti cyclical nature is accentuated in the presence of government as an active participant in the private credit market. Then, using a rich dataset on corporate loan agreement for the period 2006-2011, it is found that evidence in times of tight monetary conditions, there is an overall increase in the pass-through of policy impulses to individual loans rates. Furthermore, it is also found that the impact of these shocks is disproportionately felt by borrowers and is especially biased towards less established firms. Moreover, small (weak) banks change their loan conditions the most in tight conditions. Thus, our findings support the view that the existence of a credit channel is particularly relevant for emerging economies, hence emphasizing the need for appropriate stabilization policies. [SBP WP No. 45]. URL:[http://www.sbp.org.pk/publications/wpapers/2012/wp45.pdf].

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  • M. 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.
  • Handle: RePEc:ess:wpaper:id:4771
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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. Shabbir, Safia, 2012. "Balance Sheet Channel of Monetary Policy and Economic Growth under Fiscal Dominance: Evidence from Pakistan," MPRA Paper 41496, University Library of Munich, Germany.
    3. Hanif, Muhammad Nadim & Malik, Muhammad Jahanzeb, 2015. "Evaluating Performance of Inflation Forecasting Models of Pakistan," MPRA Paper 66843, University Library of Munich, Germany.
    4. Rahooja, Sabbah & Ali, Asif & Ahmed, Jameel & Hussain, Fayyaz & Rifat, Rizwana, 2014. "Monetary Policy and Bank Hetrogeneity: Effectiveness of Bank Lending Channel in Pakistan," MPRA Paper 60473, University Library of Munich, Germany.
    5. Shabbir, Safia & Iqbal, Javed & Hameed, Saima, 2013. "Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan," MPRA Paper 48250, University Library of Munich, Germany.

    More about this item

    Keywords

    financial propagation; balance sheet; banks; finance; borrowers’ net worth; emerging economies; funds; firms; secondary markets; investment banking; Pakistan; credit markets; lending;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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