Money Transmission Mechanisms and Identified Long-Run Relationships between the Banking Sector's Balance Sheet and the Macroeconomy in Pakistan

J L Ford and Zahid Mohammad

Discussion Papers from Department of Economics, University of Birmingham

Abstract: This paper employs semi-annual observations from 1964s1 to 2005s1 to evaluate the monetary transmission mechanism that has operated in Pakistan. It does so by using the familiar VAR approach and by analysing impulse responses and variance decompositions to banking sector and macroeconomic variables consequent upon innovations to the chosen indicator of monetary conditions. Those analyses demonstrate that the bank lending channel operates in Pakistan. The resultant VEC models embody cointegration; and this is used to identify long-run relationships between the variables. Observations are extended to 2008s2 to provide some indication of the out-of-sample quality of information provided by those relationships. Investigations using the Kalman filter provide evidence that, crucially, the innovations to the monetary indicators are influenced by sudden adjustments of monetary policy instruments.

Keywords: monetary transmission mechanisms; disaggregation of bank loans; VARs; VECs; identified cointegration vectors; innovations to SBP's monetary instruments and monetary indicator innovations (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2010-07
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:10-21

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