Should Central Bank Forget Reserve Requirements? Assessment of Reserve Requirements in Transmitting SBP’s Policy Shocks to Retail Interest Rates and Exchange Rate

Muhammad Omer

No 81, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: We have investigated the effectiveness of monetary policy tools, the discount rate and the reserve requirement ratio, in Pakistan by studying their pass through to the retail interest rates and the exchange rate. We find that the pass-through of the required reserve ratio to the retail rates and exchange rate is significant but incomplete. The pass through of discount rate; to the lending rate is complete; to the deposit rate is incomplete and; to the exchange rate is insignificant. Our results suggest that the required reserve is a more powerful tool for stabilizing the exchange rate shocks than discount rate. We, therefore, recommend State Bank of Pakistan to not to ignore the reserve requirement ratio as an active policy tool, specifically when exchange rate is under speculative attack.

Keywords: Interest rates; monetary policy; exchange rate (search for similar items in EconPapers)
JEL-codes: E43 E52 F31 (search for similar items in EconPapers)
Date: 2016-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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