Modelling the Demand for Bank Loans by Private Business Sector in Pakistan
The importance of studying demand for bank loan by private business sector stems from the fact the money supply is ‘credit-driven’ and demand-determined and at the rate of interest determined by the central bank the money supply function is horizontal as illustrated by Moore and Threadgold (1985), Coghlan, (1981), Moore (1979, 1983). The analysis of the demand for bank loan by private business sector is important for understating the monetary transmission mechanism and formulation of the effective monetary policy to achieve macroeconomic objectives. The study aimed to model the demand for bank loan by private business sector in Pakistan. We use Hylleberg, et al., (1990) seasonal unit root test for investigation of properties of data. The dynamic Autoregressive Distributed Lag (ARDL) model is used for long rung and the short run analysis of demand for bank loans by the business sector. For the testing long run relationship among the variables we used bounds test proposed by Pasaran and Shin (1995). Real rate of return on advances, economic activity, expectations about future state of economy, macroeconomic risk, inflation and foreign demand pressure are taken as the determinants of demand for bank loan by private business sector. Economic activity, real rate of interest, macroeconomic risk and inflation were found significant in affecting demand for bank loans while the estimated equation do not provide evidence for the role of foreign demand pressure and expectations about future state of economy in effecting demand for bank loans. The sign of the coefficients of real rate of return on advances, inflation and macroeconomic risk is negative whereas economic activity is directly related to demand for bank loans by private business sector. The short run model shows that the speed of adjustment is 8.5% quarterly. Therefore it takes three years to go back to the long run equilibrium level. In the short run change in rate of inflation, RRA and economic activity have negative impact. The short run equation explores that change in real rate of return (RRA) does not affect RDBL. It implies that in very short run business cannot change their demand for bank credit in response to changes in real interest rate. Changing in macroeconomic risk appears in the model in form against a priori expectations. Foreign demand pressure (FDP) has no long run effect and in short run has the coefficient having low value. The demand for bank loan by private business sector was found interest elastic and gives the provision to central bank to control credit in the economy through variations of interest rate.
|Date of creation:||Dec 2013|
|Date of revision:||Apr 2014|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Davidson, Paul & Weintraub, Sidney, 1973. "Money as Cause and Effect," Economic Journal, Royal Economic Society, vol. 83(332), pages 1117-32, December.
- Basil J. Moore, 1979. "The Endogenous Money Stock," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 2(1), pages 49-70, October.
- Benjamin M. Friedman, 1981. "The Roles of Money and Credit in Macroeconomic Analysis," NBER Working Papers 0831, National Bureau of Economic Research, Inc.
- Pesaran, M Hashem, 1997.
"The Role of Economic Theory in Modelling the Long Run,"
Royal Economic Society, vol. 107(440), pages 178-91, January.
- Pesaran, M.H., 1996. "The Role of Economic Theory in Modelling the Long Run," Cambridge Working Papers in Economics 9612, Faculty of Economics, University of Cambridge.
- Godfrey, Leslie G, 1978. "Testing against General Autoregressive and Moving Average Error Models When the Regressors Include Lagged Dependent Variables," Econometrica, Econometric Society, vol. 46(6), pages 1293-1301, November.
- Breusch, T S, 1978. "Testing for Autocorrelation in Dynamic Linear Models," Australian Economic Papers, Wiley Blackwell, vol. 17(31), pages 334-55, December.
- Basil J. Moore, 1983. "Unpacking the Post Keynesian Black Box: Bank Lending and the Money Supply," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 5(4), pages 537-556, July.
- M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
- P. Arestis & I. Biefang-Frisancho Mariscal, 1995. "The Endogenous Money Stock: Empirical Observations from the United Kingdom," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 17(4), pages 545-559, July.
- Laffont, Jean-Jacques & Garcia, Rene, 1977. "Disequilibrium Econometrics for Business Loans," Econometrica, Econometric Society, vol. 45(5), pages 1187-1204, July.
- Hicks, Sydney Smith, 1980. "Commercial banks and business loan behavior," Journal of Banking & Finance, Elsevier, vol. 4(2), pages 125-141, June.
- Ross Levine, 1997.
"Financial Development and Economic Growth: Views and Agenda,"
Journal of Economic Literature,
American Economic Association, vol. 35(2), pages 688-726, June.
- Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
- repec:crs:wpaper:9645 is not listed on IDEAS
- Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
- Melitz, Jacques & Pardue, Morris, 1973. "The Demand and Supply of Commercial Bank Loans," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(2), pages 669-92, May.
- Yannis Panagopoulos & Aristotelis Spiliotis, 1998. "The Determinants of Commercial Banks' Lending Behavior: Some Evidence for Greece," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 20(4), pages 649-672, July.
- Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:55366. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.