An empirical analysis of excess interbank liquidity: a case study of Pakistan |
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| Authors: | Muhammad Omer Jakob De Haan Bert Scholtens |
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| Institution: | 1. University of Groningen, Groningen, The Netherlands;2. State Bank of Pakistan, Karachi, Pakistanmuhammad.omer@sbp.org.pk;4. De Nederlandsche Bank, Amsterdam, The Netherlands;5. CESifo, Munich, Germany;6. School of Management, University of Saint Andrews, Scotland, UK |
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| Abstract: | We investigate the drivers of excess interbank liquidity in Pakistan, using the Autoregressive Distributed Lag approach on weekly data for December 2005 to July 2011. We find that the financing of the government budget deficit by the central bank and nonbanks leads to persistence in excess liquidity. Moreover, we identify a structural shift in the interbank market in June 2008. Before June 2008, low credit demand was driving the excess liquidity holdings by banks. After June 2008, banks’ precautionary investments in risk-free securities drive excess liquidity holdings. Monetary policy is less effective if banks hold excess liquidity for precautionary reasons. |
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| Keywords: | excess liquidity interbank money market Pakistan structural breaks bound test Autoregressive Distributed Lag approach |
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