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.
