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Impact of Interbank Liquidity on Monetary Transmission Mechanism: A Case Study of Pakistan

Author

Listed:
  • Muhammad Omer

    () (State Bank of Pakistan)

  • Jakob de Haan

    () (De Nederlandsche Bank, Amsterdam, The Netherlands)

  • Bert Scholtens

    () (CESifo, Munich, Germany)

Abstract

We investigate the transmission mechanism of policy-induced changes in the discount rate and required reserves in Pakistan. Our results suggest that the pass through to the lending rate is complete for the discount rate but incomplete for required reserves. However, only shocks to required reserves have an effect on the deposit rate and the exchange rate in the long run. The observation that the discount rate is not a very effective monetary policy tool is attributed to excess liquidity present in the interbank market of Pakistan. Finally, our findings suggest a structural shift in the interbank money market in Pakistan.

Suggested Citation

  • Muhammad Omer & Jakob de Haan & Bert Scholtens, 2014. "Impact of Interbank Liquidity on Monetary Transmission Mechanism: A Case Study of Pakistan," SBP Working Paper Series 70, State Bank of Pakistan, Research Department.
  • Handle: RePEc:sbp:wpaper:70
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    Keywords

    Monetary transmission mechanism; Pakistan; excess liquidity; VAR; ARDL;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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