Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan

In this study an attempt has been made to develop and estimate the domestic credit policy reaction function to analyse the monetary implications of interventions and sterilisation policy in Pakistan using quarterly data ranging from 1982 Q3 through 2001 Q2. By employing Johansen multivariate cointegration technique, this paper has considered the degree of sterilisation that the Pakistan has used in controlling capital flows. The evidence suggests that Pakistan sterilises around 72 percent of international reserve inflows in the long-run while 88 percent in the short-run during the period of study.Money Supply; sterlization; capital inflow; dometic credit; unit root; cointegration

Measures of Monetary Policy Stance : The Case of Pakistan

In this paper we construct two measures of the monetary policy stance. The stance of monetary policy, regarded as a quantitative measure of whether Te policy is too tight, neutral, or too loose relative to objectives of stable prices and output growth, is useful and important for at least two reasons. First, it helps the authority (central bank) to determine the course of monetary policy needed to keep the objective (goals) within the target range. Secondly, a quantitative measure of the stance is important for an empirical study of the transmission of monetary policy actions through the economy. Measuring the stance of the monetary policy free from any criticism, however, is not an easy task. As pointed out by Gecchetti (1994), there seems to be no way to measure monetary actions that does not raise serious objections. Our results show that an individual coefficient Monetary Condition Index (MCI) performs better than both the summarised MCI coefficient and the Overall measure proposed by Bernanke and Mihov (1998). The results show that in the 21-year period from 1984 to 2004, the demand shocks have dominated for about eight years. The MCI (IS-Individual coefficient) can explain six of them. However, it indicates the negative demand shock in two years as neutral. The other two measures, however, fail to capture demand shocks most of the time. This analysis suggests that the MCI (IS-Individual coefficient) plays an important role in determining output and inflation when the economy is not dominated by supply shocks. The results also show that supply shocks are dominant in the case of Pakistan. Furthermore, the exchange rate channel is more important than the interest rate channel.Monetary Policy Measures, Monetary Condition Index, Composite Measures

X-efficiency, scale economies, Technological Progress and Competition of Pakistani’s banks

This study aims at investigating empirically the x-efficiency, scale economies, and technologicalprogress of commercial banks operating in Pakistan. As banking sector efficiency is consider as a precondition for macroeconomic stability, monetary policy execution, and economic growth.We also make efficiency comparisons between the domestic and foreign banks and big banks.Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts. The scale economies for small banks, especially foreign banks are higher. Results show also that market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce with out conferring any monopolistic power to these banks. This will also help in stability of the financial sector, which an important concern of the State Bank of Pakistan SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due mergers are passed on to depositors and borrowers.x-efficiency; scale economies; technologicalprogress; Commercial Banks; Pakistan

X-efficiency, Scale Economies, Technological Progress and Competition : A Case of Banking Sector in Pakistan

This study aims at empirical investigation of the x-efficiency, scale economies, and technological progress of commercial banks operating in Pakistan using balance panel data for 29 banks. As banking sector efficiency is considered as a precondition for macroeconomic stability, monetary policy execution, and economic growth. We also make efficiency comparisons between the domestic and foreign banks and big banks. Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts for the period 2000-05. The scale economies for small banks, especially foreign banks are higher. Our results suggest the existence of technological progress for all groups of banks for the year 2000 and onward. It was lowest for big banks in 2000 and highest for foreign banks in 2005. Again, technological progress is lower for domestic banks relative to foreign banks. The results show also that the market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce without conferring any monopolistic power tothese banks. This will also help in stability of the financial sector, which is an important concern of the State Bank of Pakistan (SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due to mergers are passed on to depositors and borrowers.X-efficiency, Scale Economies, Technological Progress, competition, Spread

X-efficiency, Scale Economies, Technological Progress and Competition: A Case of Banking Sector in Pakistan

This study aims at empirical investigation of the x-efficiency, scale economies, and technological progress of commercial banks operating in Pakistan using balance panel data for 29 banks. As banking sector efficiency is considered as a precondition for macroeconomic stability, monetary policy execution, and economic growth. We also make efficiency comparisons between the domestic and foreign banks and big banks. Our results indicate that the domestic banks operating in Pakistan are relatively less efficient than their foreign counterparts for the period 2000-05. The scale economies for small banks, especially foreign banks are higher. Our results suggest the existence of technological progress for all groups of banks for the year 2000 and onward. It was lowest for big banks in 2000 and highest for foreign banks in 2005. Again, technological progress is lower for domestic banks relative to foreign banks. The results show also that the market share of big five banks are declining over the period but average interest spread shows fluctuations. The main conclusions that can be drawn from these results are that mergers are more likely to take place, especially in small banks. If the mergers do take place between small domestic banks and foreign banks, these will reduce cost due to scale economies as well as x-efficiency (because foreign banks are x-efficient relative to small domestic banks). Even if mergers do take place between small and big banks, cost will reduce without conferring any monopolistic power to these banks. This will also help in stability of the financial sector, which is an important concern of the State Bank of Pakistan (SBP). So the best policy option for SBP is to encourage mergers, while keeping a check on interest spread, so that the benefits from reduction in cost due to mergers are passed on to depositors and borrowers.X-efficiency, Scale Economies, Technological Progress, Competition, Spread

Measures of Monetary Policy Stance: The Case of Pakistan

In this paper we construct two measures of the monetary policy stance. The stance of monetary policy, regarded as a quantitative measure of whether the policy is too tight, neutral, or too loose relative to objectives of stable prices and output growth, is useful and important for at least two reasons. First, it helps the authority (central bank) to determine the course of monetary policy needed to keep the objective (goals) within the target range. Secondly, a quantitative measure of the stance is important for an empirical study of the transmission of monetary policy actions through the economy. Measuring the stance of the monetary policy free from any criticism, however, is not an easy task. As pointed out by Gecchetti (1994), “there seems to be no way to measure monetary actions that does not raise serious objections”. Our results show that an individual coefficient Monetary Condition Index (MCI) performs better than both the summarised MCI coefficient and the Overall measure proposed by Bernanke and Mihov (1998). The results show that in the 21-year period from 1984 to 2004, the demand shocks have dominated for about eight years. The MCI (IS-Individual coefficient) can explain six of them. However, it indicates the negative demand shock in two years as neutral. The other two measures, however, fail to capture demand shocks most of the time. This analysis suggests that the MCI (IS-Individual coefficient) plays an important role in determining output and inflation when the economy is not dominated by supply shocks. The results also show that supply shocks are dominant in the case of Pakistan. Furthermore, the exchange rate channel is more important than the interest rate channel.Monetary Policy Measures, Monetary Condition Index, Composite Measures

Capital Flows and Money Supply: The Degree of Sterilisation in Pakistan

Under the current managed float exchange rate system; the central bank may respond to an exchange market disequilibria by changing either the international reserves or the exchange rates. Under such a regime, a major policy difficulty is the interaction between exchange rate policies and monetary policies. The monetary authorities intervene in the exchange market in response to undesired fluctuations in exchange rates,1 could adversely affect monetary control and move the economy away from internal target such as price stability. Under such a policy dilemma, fully sterilised intervention2 involves a pure swap of foreign and domestic assets, which have not effect on the money supply, received greater attention by the policy-makers in early 1980s, particularly, through the experience of West Germany [Obstfeld (1983)]. Ideally, it provides an independent policy tool to deal with the exchange rate without affecting the internal policy targets. Moreover, it is argues that fully sterilised intervention insulate domestic policies completely from balance of payments considerations. Further, the effects of intervention on exchange rates are close to zero if intervention is completely sterilised. Given this conviction, it is hard to see why the central bank would intervene in the foreign exchange market and sterilised completely at the same time [Neumann (1984)]. It is further argued that sterilisation is capable to move exchange rates through either a portfolio or signaling channel. In developing countries, an intervention may not be used purely to stabilise exchange rate but to reduce its impacts of volatile exchange rates on price level.

Trade Liberalisation, Financial Development and Economic Growth

This paper empirically investigates the impact of trade and financial liberalisation on economic growth in Pakistan using annual observations over the period 1961-2005. The analysis is based on the bound testing approach of cointegration advanced by Pesaran, et al. (2001). The empirical findings suggest that both trade and financial policies play an important role in enhancing economic growth in Pakistan in the long-run. However, the short-run responses of the real deposit rate and trade policy variables are very low, suggesting further acceleration of the reform process. The feedback coefficient suggests a very slow rate of adjustment towards long-run equilibrium. The estimated equation remains stable over the period of study as indicated by CUSUM and CUSUMQ stability tests.Trade Liberalisation, financial development, economic growth, Bound Test