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

By Omer Muhammad, Jakob de Haan and Bert Scholtens

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.

Topics: E44 - Financial Markets and the Macroeconomy, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Year: 2014
OAI identifier: oai:mpra.ub.uni-muenchen.de:56143

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