Asymmetric Interest Rate Pass-Through at the Disaggregated Data: The Case of Pakistani Banks

Abstract

This research analyzed the interest rate pass-through (IRPT) hypothesis from central banks to commercial banks in Pakistan's banking sector. Compared to the literature, this research used disaggregated data (private, public, foreign, specialized, and all banks) with monthly frequency to capture the more appropriate behavior of the data. The data is available on the State Bank of Pakistan's website. Based on the properties of the data, this research used a co-integration estimation method in the presence of the Momentum Threshold Auto Regressive (MTAR) model. This econometric model will help us to capture the symmetric vs asymmetric co-integration and rigidities in empirical models. Empirically, we found different types of IRPT across various types of banks, but the change in the policy rate is the same for all these banks, which ultimately creates the hurdles in achieving the objective of monetary policy. Therefore, we suggest that the State Bank of Pakistan must construct different policies across different types of banks to achieve the objective of the monetary policy.