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

Abstract

The transmission of monetary policy through the interest rate mechanism has been thoroughly discussed in economic literature for quite some time. The traditional view is that, the change in real interest rate influences the cost of capital. The change in cost of capital affects the magnitude of investment and consumption and therefore the level of, real income and prices [Mishkin (1995)].1 Operationally the State bank of Pakistan, influences the yield on treasury bills (T-bills). This is done on the assumption that the yield on treasury bills influences other interest rates like the Money Market rate (Call money rate), banks’ deposit and banks’ Lending rates. The change in these rates influences the cost of capital and thus level of investment and consumption in the economy. Given this, the central bank can influence the yield on T-bills to influence the level of real income and the level of prices. The foregoing explanation of the monetary transmission mechanism makes it clear that if the changes in yield on the T-Bill rate are not passed on to the Call money rate and the bank deposit and the Lending rate then it becomes difficult for the central bank to use the channels that involve interest rate, for influencing the level of output and prices. Hence it is important to test whether the changes in the treasury bill rate are passed on to money market rate, bank deposit rate and the bank lending rate and if yes at what speed and to what extent. Therefore this study examines the pass-through of the changes in Treasury bill rate to Call Money rate, Banks’ deposit rate and Banks’ Lending rate.

Uji Empiris Mekanisme Transmisi Kebijakan Moneter: Interest Rate Pass-through Sektor Perbankan Indonesia

“…Penelitian-penelitian yang relatif lebih baru dengan data yang lebih panjang seperti De Bondt (2005) yang menguji interest rate pass-through di negara-negara Euro, Chong et al (2006) untuk data Singapura, Horváth et al (2004) di Hungaria, dan Qayyum et al (2005) di Pakistan semuanya juga menunjukkan adanya friksi pada transmisi kebijakan moneter yang dilancarkan oleh otoritas moneter masing-masing negara tersebut sehingga reaksi perubahan suku bunga perbankan terhadap kebijakan moneter terjadi secara relatif lambat. Setiap negara tersebut memiliki faktor penentu interest rate pass-through yang spesifik karena kondisi perbankan, industri keuangan non-bank, pasar modal, dan sistem keuangan yang berbeda-beda.…”

“…Peneltian Qayyum et al (2005) dengan data negara Pakistan menemukan pass-through dari policy rate (T-Bills rate) kepada call money rate terjadi sempurna dalam jangka waktu sebulan, sementara pass-through kepada bunga deposito dan kredit terjadi jauh lebih lambat. Ringkasan hasil penelitian interest rate pass-through di beberapa negara dapat diihat pada Tabel 1.…”

Pass-Through of SBP Policy Rate to Market Interest Rates: An Empirical Investigation

“…Given the role of country specific financial sector developments in determining the speed and degree of interest rate pass-through, the issue has been the subject of at least three studies in our knowledge. Qayyum et al (2005) was the first to take up this issue and estimated a transfer function by using monthly data on key interest rates from March 1991 to December 2004. Their results indicated that pass-through from T-bill rate to call money rate is almost one-to-one and completed during a month.…”

Pakistan: Breaking Out of Stagflation into Sustained Growth

“…The current monetary policy stance is silent on the issues of lags and the passthrough effect of the policy rate to inflation. There is evidence based on empirical analysis that the interest rate influences the rate of inflation with a lag of 12 to 18 months, and the magnitude of this impact is very small Qayyum, Khan, & Khawaja, 2007). Indeed, some studies show that the relationship between the interest rate and rate of inflation is positive (Khan, 2007).…”