Financial innovation and monetary policy transmission mechanism in Pakistan

Transcription

1 Inernaional Journal of Developmen and Susainabili Online ISSN: Volume 2 Number 1 (2013): Pages ISDS Aricle ID: IJDS Financial innovaion and monear polic ransmission mechanism in Pakisan Sadia Safdar *, Azra Khan FUUAST, School of Economic Sciences, Federal Urdu Universi of Ars, Science and Technolog, Islamabad, Pakisan Absrac In he recen pas here are remarkable financial innovaions in Pakisan which have he implicaions for he monear polic. In Pakisan here is no or lile empirical evidence on he impac of financial innovaion on monear polic ransmission mechanism. In his paper we fill his gap b analzing he impac of financial innovaion on monear polic ransmission mechanism b using he ineres rae channel. We use he quarerl dae covering he period, 1981Q1 o 2010Q4 for Pakisan and for esimaion we use OLS. We found ha he ineres rae channel of monear polic ransmission mechanism dampens b he ineres rae channel. Kewords: Financial innovaion, Oupu gap, Aggregae demand, Monear polic ransmission mechanism Coprigh 2013 b he Auhor(s) Published b ISDS LLC, Japan Inernaional Socie for Developmen and Susainabili (ISDS) Cie his paper as: Safdar, S. and Khan, A. (2013), Financial innovaion and monear polic ransmission mechanism in Pakisan, Inernaional Journal of Developmen and Susainabili, Vol. 2 No. 1, pp * Corresponding auhor. address: sadiasafdar81@gmail.com

2 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): Inroducion Mos of he economiss are agreed ha he economic acivi can be affeced b he monear polic. As in hese das financial secor is developing in man counries which lead he new financial insrumens. These new financial insrumens changed he impac of monear polic on he economic acivi. We found some heoreical Liraure ha how he financial innovaion can affec he monear polic ransmission mechanism bu in he case of Pakisan here is no empirical evidence which shows he relaionship of hese variables. So his gap is fulfilled b our sud b empiricall analzing he impac of financial innovaion on monear polic ransmission, and for his purpose we use he ineres rae channel. There are wo views abou he impac of financial innovaion on he monear polic ransmission mechanism b using he ineres rae channel. Some auhors sa ha he financial innovaion leads o increase he efficienc of financial ssem and due o easil available of financial asses o he invesors, i is eas for he invesors o ake more risks in order o ge he higher ields. Moreover, According o Jurgen, 2008; Mishra and Pradhah, 2008; Weber, 2008; wih increased menu of financial asses available o invesors, i is easier o ake risks in search of higher ields which enhances ineres rae pass hrough since changes in risk premium is highl pro-cclical. Moreover, wih increased financial innovaion, invesors easil access producs ha allow hedging of ineres rae risks which in urn encourages porfolio diversificaion amongs invesors wih posiive implicaions on he pass-hrough effecs of polic raes. Oher auhors argue ha here is decrease in he speed and magniude of ransmission polic o he financing cos due o he financial innovaion. In addiion due o financial innovaion bubbles and imbalances ma be emerged, if here is a difference beween he expecaions of invesors and polic acions. So here is a need o invesigae he impac of financial innovaion on monear polic ransmission mechanism in Pakisan. So in his paper we invesigae his issue empiricall. 2. Lieraure review Aruro (2001) used he IS equaion for indenifing he effecs of securiizaion on he monear polic ransmission mechanism. The auhor concluded ha he housing invesmen and real oupu boh have less sensiivi o he real ineres rae because here is increase of asse securiizaion in 1980s and 1990s. This implies ha ineres raes are no direcl relaed o he securiizaion largel affeced channels. The impac of monear polic on he housing prices is examined b AoKi e al. (2004) and concludes ha he financial innovaion like eas access o credi brings changes in he monear ransmission mechanism. In addiion Noer (2007) poins ou ha here is increase in he effeciveness of monear polic due o he financial innovaion hrough he ineres rae channel. According o he auhor financial innovaion leads o decrease he ransacion cos wih he resul of increase in holding of financial asse and faciliae he funding and invesmen sraegies. Firms have large access o securiies markes due o he financial innovaions which leads o decrease he informaion asmmeries. ISDS 391

3 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): According o Ho (2006) ransmission mechanism can be affeced b hose financial developmens which have he impac on he financial marke condiions. The auhor found he hree main channels ha can affec he monear polic which are he ineres rae channel, asse channel and he channel of exchange rae. He furher argues ha he financial innovaion leads o improve he economic agen s abili o lock in curren ineres rae for fuure funding needs. Ignazio (2007) observed ha due o he financial innovaion economic agens have a large range of financing and invesmen opporuniies. he srengh and speed of monear polic ransmission mechanism is affeced wih he developmens in he financial secor in he econom. These developmens lead o more liquid and complee financial markes and he cos of invesmen financing and reurn on saving affecs he whole econom. 3. Mehodolog Differen auhors have used differen approaches o explain he linkages beween he ransmission mechanism and he macroeconomic variables. Some auhors have used he differen channels like exchange rae channel, ineres rae channel, and he credi mone channel. Bu as he financial innovaion is concerned his paper is focusing on he ineres rae channel. The heoreical basis of our sud is he radiional Kenesian heor which sas ha he real cos of borrowing is influenced b he monear polic b using he nominal shor erm ineres rae. B changing he nominal ineres rae we expec ha i has he influence on he real rae which ulimael affecs he ke componens of oupu like he consumpion and invesmen Model As according o he Rudebush-Svensson (1999) he basic IS equaion is 1 r u where is he oupu gap and r shows he real ineres rae. We modif he above equaion o es for he effecs of financial innovaion on he reacion o monear polic moves as done b Aruro (2001) ( i 1 1 ) 3Z 4Z ( i 1 1 ) In he above equaion wo addiional variables are used. The erm Z shows he financial innovaion and he second erm Z ( i 1 1) is he ineracion erm (ineracion of financial innovaion wih he real ineres rae). 392 ISDS

4 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): Daa and sources In Presen sud we use he quarerl ime series daa for he ime period 1981-Q1 o 2010-Q4 for Pakisan. All he daa on differen variables are available excep he daa of oupu gap. Oupu gap is calculaed b using rend mehod Consricion of variables We are using he quarerl based ime series daa. In order o use he ime series daa of some variables we make or consruc he variables o use hem in he specified form menioned in he models Indusrial producion index Firs of all for GDP we use he prox of indusrial producivi index, as he quarerl daa of GDP is no available in Pakisan. As Arb and Kemal (2004) calculaed he GDP daa ill he on quarerl basis, bu in our analsis we are using he quarerl daa ill So we have o use manufacuring producivi index 2 because we are using he daa ill In our analsis oupu gap is defined as: where is de-seasonalised oupu, * is he poenial oupu and we use he rend mehod o esimae i. * * c In he above equaion he series has a quadraic rend if 2 is significan oherwise series has a linear rend. The difference beween Real ineres rae * and is he oupu gap. For real ineres rae we use call mone rae on quarerl based in our analsis. The real ineres rae is made as: r = i π e where i is he nominal ineres rae and π e is expeced rae of inflaion Inflaion Inflaion is calculaed as percenage change in de-seasonalized series of CPI on ear-on-ear basis, i.e., 1 I have used he daa given b Arb and Kemal (2004) in m M.Phil hesis 2 As he manufacuring secor is a par of GDP bu his secor leads o he large changes in GDP so we can use i as a prox. ISDS 393

5 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): ( P P P 4 where P is seasonall adjused series of consumer price index 4 ) * Financial innovaion We use he variable of financial innovaion in he AD equaion. Usuall his variable is used as he improvemen in he pamen ssem (No. of ATM machines, No. of credi cards or ransacions hrough credi cards and ATMs) bu due of he lack of complee daa for our analsis we use he prox for he financial innovaion and ha is he raio of broad mone o he narrow mone Sources of daa To esimae he above equaions, we colleced quarerl daa. Our sample period ranges from 1981Q1 o 2010Q4 for Pakisan. We colleced shor-erm ineres raes (call mone rae), indusrial producion index, and consumer price index from he IMF s Inernaional Financial Saisics (IFS). As he daa of oupu gap is no available so afer having he quarerl IPI daa, we found poenial oupu hrough using he Hodrick- Presco filer and hen made he daa of oupu gap b using he above menioned formula. 4. Resuls and analsis 4.1. Uni roo es There are man uni roo ess in lieraure bu we are using onl he augmened fuller es which is commonl used b man economiss. According o his es he series is said o be saionar a level if we rejec our null hpohesis ha here is a uni roo in a series. For he purpose o check he saionari, we use he augmened Dicke-Fuller (ADF) es. The es shows ha all he variables are saionar a level. The resuls are shown in able given below Regression analsis The below able shows he resuls of esimaed IS equaions for he period of 1981Q1 o 2010Q4. The coefficiens of baseline equaion wihou he impac of financial innovaion are given and values are given for he respecive equaion. The coefficien on he real ineres rae is negaive and significan in he baseline equaion and he coefficiens have he almos same magniude as Malik and Ahmad (2007). Bu he lag value of he oupu gap is posiivel and significanl relaed o he dependen variable. LM es shows he presence of he auocorrelaion. 394 ISDS

6 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): Table 1. Resuls of ADF Tes Variables Inercep/Trend ADF Sa Inercep Ineres rae Inercep & rend Inercep Inflaion Inercep & rend Inercep Oupu Gap Inercep & rend Financial Inercep Innovaion Inercep & rend Criical Value 5 & 10 % Saionar DW-Sa Level Level Level Level Level Level Level Level Table 2. Esimaion Resuls of AD Equaion Variables Coefficiens -values 1 ( i ) 1 1 R Squared Serial Correlaion LM Tes (Prob ) ISDS 395

7 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): Now b including he erms of financial innovaions in he regression analsis we have he following resuls. Table 3. Esimaion Resuls of AD Equaion Variables Coefficiens -values C ( i ) Z Z ( i 1 1 ) R Squared Serial Correlaion LM Tes (Prob ) The above able shows he resuls of esimaed IS equaions for he period of 1981:Q1 o 2010:Q4. The coefficiens of baseline equaion wih he impac of financial innovaion are given in he second column where as in he hird column he values are given for he respecive equaion. The coefficien on he real ineres rae is negaive and significan in he equaion. Bu he lag value of he oupu gap is posiivel and significanl relaed o he dependen variable. When boh he financial innovaion erm and he ineracion erm are included in he model he resuls show ha he are boh significan a 10% level. The resul of ineracion erm shows ha he financial innovaion increases he posiive oupu gap because he financial innovaion leads o increase he efficienc wih which he mone is ransmied in he econom. Due o his increase in efficienc he finances are easil access able o he insiuions and households since ineres rae is reduced wih he minimized ransacions coss and are herefore able o consume and inves more. LM es shows he presence of he auocorrelaion. 5. Conclusion and polic implicaion Financial innovaion is no quanifiable and is difficul o measure. Differen auhors have used differen proxies for he financial innovaions like banking asses o GDP raio and M2/M1 in an economic framework. 396 ISDS

8 Inernaional Journal of Developmen and Susainabili Vol.2 No.1 (2013): The significan resuls of financial innovaion show ha i has he implicaions for he oupu and monear polic. When he financial innovaion is ineraced wih he ineres rae hen negaive relaionship of ineres rae wih he oupu gap is reversed which implies ha he cenral bank acions hrough he ineres rae channel is dampened. As in Pakisan here are advancemens in pamen echnolog which ma pilo he consumpion smoohing and leads o decrease he imporance of ineres rae channel in he ransmission mechanism. So he cenral bank should revise he polic argeing frameworks and insrumens and should use he mix ools. References Akhar, M. (1983), Financial Innovaions and Implicaions for Monear Polic: An Inernaional Perspecive, BIS Economic Papers, Vol.9, pp Aoki, K., Proudman, J. and Vlieghe, G. (2004), House Prices, Consumpion, and Monear Polic: A Financial Acceleraor Approach, Journal of Financial Inermediaion, Vol.13, pp Aruro, E. (2002), Securiizaion and he Efficac of Monear Polic, Federal Reserve Bank of New York, Economic Polic Review, Vol.9, pp Aruro, E. (2001), Financial Innovaion and he Monear Transmission Mechanism, Mimeo, Federal Reserve Bank of New York. Arrau e al. (1995), The Demand for Mone in Developing Counries: Assessing he Role of Financial Innovaion, Journal of Developmen Economics, Vol.46, No.2, pp Arrau, P. and De Gregorio, J. (1991), Financial Innovaion and Mone Demand: Theor and empirical Implemenaion, Polic Research and Exernal Affairs Working Papers, WPS 585. Bol, W. and van Els, P.J.A. (2002), Oupu gap and Inflaion in he EU, De Nederlandsche Bank Saff Papers. Ebson, U. and Ikhide, S. (2002), Monear Polic Transmission Mechanism in Namibia, BON Working Paper, Vol.2. Era, D. and Holger, F. (2006), Transmission Mechanisms of Monear Polic in Armenia: Evidence from VAR Analsis, IMF Working Paper, WP/06/248. Florin, C. and Twaddle, J. (2004), The Oupu gap and is Role in Monear Polic Decision Making, Reserve Bank of New Zealand Bullein, Vol.66, No.1, pp Fuhrer, J. and Rudebusch, G. (2004), Esimaing he Euler Equaion for Oupu, Journal of Monear Economics, Vol.51, No.6, pp ISDS 397