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Should Central Bank Forget Reserve Requirements? Assessment of Reserve Requirements in Transmitting SBP’s Policy Shocks to Retail Interest Rates and Exchange Rate

Author

Listed:
  • Muhammad Omer

    (State Bank of Pakistan)

Abstract

We have investigated the effectiveness of monetary policy tools, the discount rate and the reserve requirement ratio, in Pakistan by studying their pass through to the retail interest rates and the exchange rate. We find that the pass-through of the required reserve ratio to the retail rates and exchange rate is significant but incomplete. The pass through of discount rate; to the lending rate is complete; to the deposit rate is incomplete and; to the exchange rate is insignificant. Our results suggest that the required reserve is a more powerful tool for stabilizing the exchange rate shocks than discount rate. We, therefore, recommend State Bank of Pakistan to not to ignore the reserve requirement ratio as an active policy tool, specifically when exchange rate is under speculative attack.

Suggested Citation

  • Muhammad Omer, 2016. "Should Central Bank Forget Reserve Requirements? Assessment of Reserve Requirements in Transmitting SBP’s Policy Shocks to Retail Interest Rates and Exchange Rate," SBP Working Paper Series 81, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:81
    as

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    File URL: http://www.sbp.org.pk/publications/wpapers/2016/wp81.pdf
    File Function: First version, 2016
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    More about this item

    Keywords

    Interest rates; monetary policy; exchange rate;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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