An Empirical Investigation of Banks-Centric View of Monetary Policy from Pakistan

Abstract

The banks centric-view of monetary policy works through the response of credit supply to the indicators of monetary policy such as interest rates and other policy instruments. The importance of the banks’ credit supply channel came to the forefront since the 2007 world-wide depression affected badly the stability of banking sector. Yet, we know less about the relative role of banks in monetary policy transmission mechanism, especially, these impacts are observed on the basis of size of banks. This paper therefore empirically examines the impact of monetary policy on banks’ lending channel of monetary policy. The robust two-step system-the Generalize Method of Moments (GMM) estimator is applied on an unbalanced panel dataset over the period 2005-2016. While estimating the effects of three alternative measures of monetary policy on banks’ credit supply, several bank-specific variables are included in the specification as control variables. We provide strong evidence on the existence of banks’ lending cannel in baseline model and differential impact of monetary policy measures on small versus large banks in extended model. Our findings suggest that there is a vital need to take into account the size of banks while designing the instruments of an effective monetary to manage credit supply in the economy.”