Interest Rate Pass‐Through Empirical Evidence from Pakistan

Abstract

This article empirically examines the interest rate pass‐through mechanism for Pakistan, using six‐month treasury bills as a proxy for the policy rate (the exogenous variable) and the weighted average lending rate and weighted average deposit rate as endogenous variables representing the lending and deposit channels, respectively. We use data for a six‐year period from June 2005 to May 2011, published by the central monetary authority in Pakistan. The widely accepted error correction mechanism is used to examine the short‐run and longrun pass‐through; a vector error correction mechanism impulse response function helps measure the short‐run speed of the pass‐through. We find that there is an incomplete pass‐through in Pakistan for both the lending and deposit channels. The impact is greater on the lending channel than on the deposit channel in both the short and long run, while the adjustment speed is higher for the lending channel.