Financial innovation and monetary policy transmission mechanism in Pakistan

Abstract

In the recent past there are remarkable financial innovations in Pakistan which have the implications for the monetary policy. In Pakistan there is no or little empirical evidence on the impact of financial innovation on monetary policy transmission mechanism. In this paper we fill this gap by analyzing the impact of financial innovation on monetary policy transmission mechanism by using the interest rate channel. We use the quarterly date covering the period, 1981Q1 to 2010Q4 for Pakistan and for estimation we use OLS. We found that the interest rate channel of monetary policy transmission mechanism dampens by the interest rate channel.

Keywords

• Financial innovation
• Output gap
• Aggregate demand
• Monetary policy transmission mechanism