Bank Lending and Monetary Shocks: Evidence from a Developing Economy

This paper investigates the role of credit market frictions in the transmission of monetary shocks in Pakistan. First, using macro data, it is shown that banking spreads are countercyclical, even it is controlled for credit risk, monetary policy and potential maturity mismatches. It is found that this anti cyclical nature is accentuated in the presence of government as an active participant in the private credit market. Then, using a rich dataset on corporate loan agreement for the period 2006-2011, it is found that evidence in times of tight monetary conditions, there is an overall increase in the pass-through of policy impulses to individual loans rates. Furthermore, it is also found that the impact of these shocks is disproportionately felt by borrowers and is especially biased towards less established firms. Moreover, small (weak) banks change their loan conditions the most in tight conditions. Thus, our findings support the view that the existence of a credit channel is particularly relevant for emerging economies, hence emphasizing the need for appropriate stabilization policies. [SBP WP No. 45]. URL:[http://www.sbp.org.pk/publications/wpapers/2012/wp45.pdf].