Degree
Master of Science in Economics
Faculty / School
Faculty of Business Administration (FBA)
Department
Department of Economics
Date of Submission
2014-01-01
Supervisor
Dr. Muhammad Ather Elahi, Department of Economics & Finance,Institute of Business Administration (IBA), Karachi
Project Type
MSECO Research Project
Access Type
Restricted Access
Keywords
Pakistan, Policy rate, Engel Granger Co-integration technique, Error correction framework, Financial markets
Abstract
The purpose of this study is to investigate that how the retail rates respond when a change in policy rate occurs and how much time required by these rates to converge to their long run level. Further this study specifically focused on banks’ behavior according to various characteristics derived from their financial statements data. Using Engel Granger Co-integration technique and error correction framework on monthly data on Central bank’s policy rate, weighted average overnight repo rates, open market operations cut off rate, money market rate, interbank rate of various tenors and bank wise WALR and WADR from July 2003 to December 2013. We utilize some of the quantitative criteria to cluster these banks according to their ratings as Central Bank often does on the basis of capital and the relevant adequacy, assets and asset quality, earnings and earnings quality, Liquidity and ownership etc. There is sluggish and deficient PT in case of WADR and less than 50 percent of the change induced in policy variables is transmitting to WADRs. Similarly, lending rates (WALR) are also found to be sluggish but the transmission is higher than in case of WADRs. WALRs are more responsive to T-bill Cut-off rates and on average commercial banks passed through 0.87 in response to 1 percent change in T-bill rate in short run. The underdeveloped financial markets as well as less competitive non-banking sector left very limited avenues for the depositors to invest the money except to place them with the banks and banks might exploit this situation by showing collusive behavior. Further, less interest sensitive behavior of the depositors might also another reason of sluggish pass through to deposit rates. Additionally, these retail rates in short run are more responsive to the T-bill cut off rate as compared to the policy rate and OMO cut off rate implying that it is the fiscal side rather than the monetary which is driving retail banking rates. Only those banks that are having liquidity issues or lower level of earnings are more responsive to the OMO cut off and policy rates. This study explores only first two stages of Monetary Policy Transmission Mechanism, future studies can explore the remaining stages of transmission mechanism. Further the criterion used are qualitative, more criterions may be used for in depth analyses as per the requirement of hypothesis set. Furthermore, the imposition of regulatory requirements by monetary authorities on commercial banks and inclusion of macroeconomic variables in achieving pass through will also be an interesting area for future research in Pakistan.
Pages
xii, 86
Recommended Citation
Mirza, F. A. (2014). Determining the behaviour of interest rate pass through in Pakistan: an empirical investigation (Unpublished graduate research project). Institute of Business Administration, Pakistan. Retrieved from https://ir.iba.edu.pk/research-projects-mseco/5
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