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Impact of monetary policy on lending and deposit rates in Pakistan: Panel data analysis

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  • Mohsin, Hasan Muhammad

Abstract

The study estimates impact of monetary policy (discount rate) on lending and deposit rates in Pakistan using bank type data from November 2001 to March 2011. The study finds evidence of long run relationship between lending and discount rate but deposit rate is not cointegrated with discount rate, monetary policy instrument. The study also finds an increase in the lending rate pass through rate during restricted monetary policy times (2005-2010), whereas deposit rate pass through remains same. The study finds that overall banks pass on only 20% impact of a change in discount rate to the lenders in first month implying it is not complete. There is also significant difference in various bank types pass through rates. The pass through of deposit rate is further low at 0.16 as revealed by short run analysis. It implies that the effectiveness of monetary policy is limited in Pakistan.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33301.

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Date of creation: Jan 2011
Date of revision: Aug 2011
Handle: RePEc:pra:mprapa:33301
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Keywords: Discount rate; pass-through; monetary policy;

Find related papers by JEL classification:

  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • E00 - Macroeconomics and Monetary Economics - - General - - - General

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  10. 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.
  11. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
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  13. Alexander F. Tieman, 2004. "Interest Rate Pass-Through in Romania and Other Central European Economies," IMF Working Papers 04/211, International Monetary Fund.
  14. Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1839-1870, July.
  15. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
  16. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  17. Mohsin, Hasan Muhammad & Rivers, P, 2011. "Are domestic banks' pass through higher than foreign banks? Empirical evidence from Pakistan," MPRA Paper 33282, University Library of Munich, Germany, revised Apr 2011.
  18. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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Cited by:

  1. Muhammad, Omer & de Haan, Jakob & Scholtens, Bert, 2014. "Impact of Interbank Liquidity on Monetary Transmission Mechanism: A Case Study of Pakistan," MPRA Paper 56161, University Library of Munich, Germany.

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