The Effectiveness of Monetary Transmission of Commercial Banks on Monetary and Macroeconomic Variables in Pakistan

• Main Author: Munib, Badar
• Format: Thesis
• Language: English; English
• Published: 2023
• Online Access: http://ur.aeu.edu.my/1090/1/Dr%20Munib%20Badar.pdf; http://ur.aeu.edu.my/1090/2/Dr%20Munib%20Badar-1-24.pdf; http://ur.aeu.edu.my/1090/; https://online.fliphtml5.com/sppgg/lrol/?1684305752079

The central bank in every country uses its monetary policy as an instrument to control inflation, promote output and employment growth, and for overall economic management. This study aims to examine the role of financial intermediaries, i.e., commercial banks of Pakistan, and to determine whether they are effectively playing their expected role in monetary transmission. An extensive literature review revealed that the existing literature on commercial banks is widely divided on the impact and potential of commercial banks in influencing monetary and economic aggregates. A few studies have been conducted in Pakistan on the impact of monetary policy decisions on commercial banks from an aggregate perspective. However, some disaggregated aspects like the sectoral performance of bank loans, heterogeneity among banks and Islamic versus conventional philosophy of banks are the gaps in the literature that warrant research to identify the effectiveness of monetary transmission in Pakistan. As such, the study examines long and short-run relationships between monetary policy and the commercial banks' related variables and between the commercial banks' related variables and macroeconomic variables. The study used monthly and quarterly data with cross-sectional and panel characteristics from 1998 to 2018. The variables include central bank policy rate and the financial market dynamics. Data are collected from the official websites of the State Bank of Pakistan and tested by using econometric techniques. The outcome of the Study reveals that monetary decisions influence commercial banks to some extent. However, these could not influence the economic aggregates significantly. The likely reason may be the underdeveloped financial markets and undocumented economy, which diminish monetary policy influence/impact in Pakistan. In disaggregate analysis of commercial banks, however, certain areas like the sectoral performance of loans, and the Islamic banks contribute significantly to varying effects of monetary policy on Pakistan economy.