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

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

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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File URL: http://mpra.ub.uni-muenchen.de/2056/1/MPRA_paper_2056.pdf
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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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  1. Don Bredin & Trevor Fitzpatrick & Gerard O Reilly, 2002. "Retail Interest Rate Pass-Through - The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 33(2), pages 223-246.
  2. 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.
  3. 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.
  4. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
  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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