Monetary Policy and Bank Hetrogeneity: Effectiveness of Bank Lending Channel in Pakistan

Rahooja, Sabbah and Ali, Asif and Ahmed, Jameel and Hussain, Fayyaz and Rifat, Rizwana (2014): Monetary Policy and Bank Hetrogeneity: Effectiveness of Bank Lending Channel in Pakistan.

Abstract

We investigate, using vector autoregressions (VAR) and Panel Data Analysis, the role of banks in monetary policy transmission in Pakistan. Empirical evidence suggests that the 'bank lending channel' is at work at the aggregate level. Loans, deposits and government securities all reduce after a shock to the monetary policy. When we examine bank heterogeneity in terms of size, liquidity and capitalization, the results are mixed. Size is found to be a relevant characteristic. Capitalization, measured by excess capital, is also somewhat effective. Thus, small sized and capital constrained banks respond more to monetary policy signals. Liquidity and the traditional measure of capital, on the other hand, are found to be weaker characteristics. Moreover, the results suggest that the market for loans has a stationary size distribution (no monopolistic tendencies) in Pakistan.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary Policy Transmission, Bank Lending
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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