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An Empirical Analysis of Excess Interbank Liquidity: A Case Study of Pakistan

Muhammad Omer (), Jakob de Haan () and Bert Scholtens ()

No 69, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: We investigate the drivers of excess interbank liquidity in Pakistan, using the Autoregressive Distributed Lag approach on weekly data for December 2005 to July 2011. We find that the financing of the government budget deficit by the central bank and non-banks leads to persistence in excess liquidity. Moreover, we identify a structural shift in the interbank market in June 2008. Before June 2008, low credit demand was driving the excess liquidity holdings by banks. After June 2008, banks’ precautionary investments in risk-free securities drive excess liquidity holdings. Monetary policy is less effective if banks hold excess liquidity for precautionary reasons.

Keywords: Excess liquidity; interbank money market; Pakistan; structural breaks; bound test; Autoregressive Distributed Lag approach (search for similar items in EconPapers)
JEL-codes: E44 E61 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2014-05
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http://www.sbp.org.pk/repec/sbp/wpaper/wp69.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: An empirical analysis of excess interbank liquidity: a case study of Pakistan (2015) Downloads
Working Paper: An Empirical Analysis of Excess Interbank Liquidity: A Case Study of Pakistan (2014) Downloads
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