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The Economics of Inflation, Issues in the Design of Monetary Policy Rule, and Monetary Policy Reaction Function in Pakistan
Ather Maqsood Ahmed and Wasim Shahid Malik
Published:Sept 2011
The objective of this study is to estimate a monetary policy reaction
function for Pakistan. To do this, we use data for the period 1992Q4–2010Q2.
Our results show that the State Bank of Pakistan reacts to changes in the
inflation rate and economic activity in a manner that is consistent with the
Taylor (1993) rule, and with the explicit objective of interest rate smoothing and
exchange rate management. This policy has remained consistent for most of the
sample period, except for the last two years, during which a price hike and the
massive depreciation of domestic currency led to a significant change in the
parameters of the policy reaction function. We also find evidence of nonlinearity
in the reaction function as the response to an inflation rate above 6.4 percent is
found to be more aggressive than that in low inflationary episodes.
KEYWORDS:
Inflation,
Monetary Policy,
Pakistan.
JEL:
E52,
P44.
Market Discipline in Commercial Banking: Evidence from the Market for Bank Equity
Ayesha Afzal and Nawazish Mirza
Published:Sept 2011
This study presents empirical evidence of market discipline, using a panel
dataset of listed banks on the Karachi Stock Exchange. We construct multiple riskbased
measures from the stock prices between 2004 and 2009 to determine whether
an increase in the risk profile results in an increase in compensation for depositors
and other creditors. The risk variables used include market risk, value at risk, size
and value premium, default likelihood indicator, price relatives, and a control
variable representing gross domestic product growth. We find a significant
relationship between our risk factors and cost of deposits, indicating that banks
align deposit compensation with their risk perception. However, we cannot find a
link between the market perception of risk and deposit switching. These findings
have important implications for policymakers as market discipline could
complement the state’s regulatory role and lower the cost of supervision. Our
estimations of value at risk and the default likelihood indicator using stochastic
simulations is a methodological contribution that could be used for effective risk
management practices.
KEYWORDS:
Market Discipline,
Karachi Stock Exchange,
Value at Risk,
Default Likelihood Indicator.
JEL:
G21,
G20.
Interest Margins and Banks’ Asset-Liability Composition
Idrees Khawaja
Published:Sept 2011
This article examines the determinants of banks’ interest margins. The
results suggest that short-term government bonds (floating debt) and the large
share of interest-insensitive deposits held by banks are the key determinants of
the interest margin. This is in contrast to the popular perception that the market
power of the oligopolistic industry contributes to banks’ high interest margins.
While a behavioral change—a greater inclination to save and an increase in
output—might reduce the share of interest-insensitive deposits, the reduction in
government debt depends on the state of certain macro-variables and
macroeconomic management. Given these determinants and the possible ways of
containing margins, the containment process is a tall order. The study also
implicitly confirms that government borrowing is crowding out private
investment.
KEYWORDS:
Interest Margin,
Banks,
Pakistan.
JEL:
G12,
G21.
The Impact of Bank Governance on Bank Performance in Pakistan
Abid A. Burki and Shabbir Ahmad
Published:Sept 2011
This study attempts to investigate the impact of changes in bank
governance on bank performance in Pakistan. Governance changes entail the
privatization and restructuring of state-owned banks, and the merger and
acquisition of private and foreign banks. Using the concept of frontier efficiency,
we adopt an empirical framework that allows us to study the impact of all
governance reform variables in the same model. First, we estimate a stochastic
cost frontier model using unbalanced panel data on commercial banks for the
period 1991–2005. Second, we decompose banks’ total factor productivity (TFP)
change into its different components, using the estimated frontier. In general, the
results show an improvement in banks’ cost efficiency following changes in bank
governance. We note that governance changes bring about an improvement in
banks’ TFP vis-à-vis that of banks that did not undergo governance changes. We
find a declining trend in TFP change (TFPC), which could be a consequence of
the banking industry’s increased profitability. We also note that bank selection
for governance changes has a mixed effect on TFPC, while bank consolidation
seems to be more effective in improving TFPC.
KEYWORDS:
Bank Reform,
Total Factor Productivity,
Stochastic Frontier Model,
Pakistan.
JEL:
D24,
M31,
J54.
An Evaluation of Mutual Fund Performance in an Emerging Economy: The Case of Pakistan
Mahreen Mahmud and Nawazish Mirza
Published:Sept 2011
This article examines the performance of Pakistan’s mutual fund
industry during 2006–10, a period characterized both by bullish and bearish
markets. An analysis of fund types reveals that Islamic funds have shown strong
growth in spite of their lackluster performance compared to conventional funds.
Income funds appear to have suffered as a consequence of the underdeveloped
bond market, and very high t-bill rates have resulted in negative excess returns
during the period. For stock funds, market indices and size are significant factors
that indicate a preference for large-cap stocks of managers. With consistently
negative or insignificant alphas, no fund manages to outperform the market.
KEYWORDS:
Mutual Funds,
Fund Performance,
Pakistan.
JEL:
G11,
G23.
Financing Constraints: Determinants and Implications for Firm Growth in Pakistan
Hamna Ahmed and Naved Hamid
Published:Sept 2011
This study has a twofold objective: (i) to investigate the determinants of
firm growth, specifically the extent to which finance constrains enterprise
growth; and (ii) to explore the determinants of external financial access in
Pakistan. External financial access is defined as access to credit through
institutional sources such as private commercial banks, nonbank financial
institutions, and state-owned banks and agencies. The study uses data from the
second round of the Investment Climate Assessment Survey conducted by the
World Bank in FY 2007. The methodology entails using an instrumental variable
approach to estimate the impact of external financial access on firm growth while
employing a probit model to explore the determinants of external financial access.
The results suggest the following: First, finance is a binding constraint to firm
growth in Pakistan—a 10 percent increase in the working capital financed
through external sources is predicted to increase the average annual growth rate
by 5.6 percentage points. Second, financial depth is important for access—across
the country, access is better where there is greater penetration of financial
infrastructure. Third, a range of internal factors such as size, export status,
quality of human capital, and organizational form emerge as important
determinants of external financial access in Pakistan.
KEYWORDS:
Financial Access,
Firms,
Financial Depth,
Pakistan.
JEL:
C36,
043.
Norms of Cooperation, Trust, Altruism, and Fairness: Evidence from Lab Experiments on Pakistani Students
Theresa Thompson Chaudhry and Misha Saleem
Published:Sept 2011
A rich area of economic research focuses on the role of controlled
experiments to understand interactions between agents and agents’ own deepseeded
preferences as they pertain to pro-social behavior. Four of the most
common games—the prisoner’s dilemma, and the trust, ultimatum, and dictator
games—have been used both in laboratory and field settings, and with student
and nonstudent participants. Cardenas and Carpenter (2008) have compiled
evidence for these four games that has been collected from behavioral experiments
conducted in the US and a number of developing countries. In this paper, we
wish to add to the existing evidence by presenting the results of lab experiments
carried out on a population of economics students at a university in Lahore.
KEYWORDS:
Behavioral Environment,
Games,
Lahore,
Pakistan.
JEL:
C73,
C93.
Prospects for Cooperative Marketing among Surgical Instrument Producers in Pakistan
Theresa Thompson Chaudhry
Published:Jan - June 2011
Given that clustered firms in developing countries generally sell their
goods through multinational firms, we seek to determine under what conditions
might clustered surgical instrument firms band together and form a cooperative
to “break out” of their relationship with multinational buyers to market their
own goods. Our results, based on a survey of surgical instrument producers in
Sialkot, Pakistan, demonstrate that firms are more likely to be interested in such
initiatives once they have already had some direct experience in marketing, such
as selling products under their own brand name and having already sold some
goods directly to hospitals. Firms that have had relationships of longer duration
with customers tend to be less likely to be interested in joint action initiatives.
This indicates that a higher opportunity cost of engaging in joint action (as
proxied by relationships of longer duration) reduces the likelihood of cooperative
marketing initiatives in clusters.
KEYWORDS:
Surgical instruments,
goods,
cooperative,
market,
Pakistan.
JEL:
D24,
M31,
J54.
The Trade Potential of Pakistan: An Application of the Gravity Model
Nazia Gul and Hafiz M. Yasin
Published:Sept 2011
This paper attempts to estimate Pakistan’s trade potential, using the gravity model of trade. Panel data for the period 1981-2005 across 42 countries is employed in the analysis. The coefficients obtained from the model are then used to predict the country’s trade potential worldwide as well as within specific trading regions. The results reveal that Pakistan’s trade potential is highest with countries in the Asia-Pacific region (the Association of Southeast Asian Nations [ASEAN]), the European Union (EU), the Middle East, Latin America, and North America. Specifically, the maximum potential exists with Japan, Sri Lanka, Bangladesh, Malaysia, the Philippines, New Zealand, Norway, Sweden, Italy, and Denmark. Therefore, Pakistan should explore ways and means to further improve its trade relations with the countries concerned, and also concentrate on ASEAN, the Middle East, and the EU to increase its market share as far as possible. The volume of trade between Pakistan and other members of the South Asian Association for Regional Cooperation (SAARC) and Economic Cooperation Organization (ECO) is very low, despite the existence of significant potential. The main obstacles to this end are the political and social tensions among neighboring countries, particularly between Pakistan and India, which are the main players of SAARC. The same obstacles exist in the case of the EU and NAFTA, where Pakistani exports are adversely affected by political considerations.
KEYWORDS:
Trade potential,
gravity model,
Pakistan.
JEL:
O16,
F19.
Comparative Advantage of Major Crops Production in Punjab: An Application of Policy Analysis Matrix
Muhammad A. Quddus and Usman Mustafa
Published:Jan - June 2011
This study uses data from 1999/2000 to 2004/05 to determine the relative efficiency of major crops (wheat, rice, sugarcane, and cotton) in Punjab (Pakistan) and their comparative advantage in international trade as measured by economic profitability and the domestic resource cost (DRC) ratio. An economic profitability analysis demonstrates that Punjab has a comparative advantage in the domestic production of wheat for self-sufficiency but not for export purposes. In basmati production, Punjab has a comparative advantage, and increasing Basmati production for export is a viable economic proposition. The nominal protection coefficient (NPC), effective protection coefficient (EPC), and DRC for Irri rice are more than 1: the given input-output relationship and export prices do not give Punjab a comparative advantage in production of Irri for export. Sugarcane growers did not receive economic prices (i.e. prices reflecting true opportunity costs) during 2001/02 and 2002/03 in an importing scenario, while in 2003/04, the NPC was 1.02, indicating positive support to sugarcane growers. The NPCs estimated under an exporting situation range from 1.33 to 1.99, indicating that the prices received by growers are higher than the export parity/economic prices. This is also an indication that sugarcane cultivation for exporting sugar is not feasible in terms of economic value. The NPCs for cotton under an importing scenario were less than 1 while under an exporting scenario were either close to or greater than 1, implying an expansion in cotton production as imports have been more expensive than domestic production.
KEYWORDS:
Crops,
comparative advantage,
domestic resource cost,
policy analysis matrix (PAM),
Pakistan.
JEL:
Q18,
Q17.