Analyzing Various Channels of Monetary Policy Transmission Mechanism: The Case of Pakistan

Abstract

This paper measures the impact of the interest rate, credit, and risk channel on the monetary policy of Pakistan, based on a data set from 1995 to 2020. It also examines the long-run and the short-run relationship between foreign debt, bank capital, and monetary policy transmission mechanisms by using the Autoregressive Distributed Lag (ARDL) model. The results suggest that the risk channel does not follow the co- integration benchmark. We found an insignificant association between the independent and dependent variables, suggesting no long-term relationship between the model’s variables. The interest rate coefficient is negative, but its relationship with the dependent variable is significant. Similarly, the credit channel’s coefficient is negative, but its association with the dependent variable is statistically significant at the 90% confidence level. The research also suggests that the risk channel has a short-term association. At the same time, interest rates and credit channels have short-term and long-term relationships.

Keywords

• interest rate
• credit risk
• monetary policy