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Implications of Monetary Policy for Corporate Sector and Economic Growth in Pakistan

Author

Listed:
  • Safia Shabbir

    (State Bank of Pakistan)

Abstract
Using micro data on non-financial listed companies in Pakistan, over the period of 2000-2010, this paper emphasizes the impact of monetary policy on economic growth through balance sheet channel. At first step, monetary tightening deteriorates the net worth of the firms and leads to cash flow squeeze which in turn affects the economic growth. We find this impact to last for three years over the balance sheets of the firms. Since industrial sector drives the economic growth, we forecast corporate profitability at the second step. Empirical investigation shows that corporate profitability reverts to its mean at the rate of 25 percent. During peak, mean reversion is 30 percent while it is 19 percent during trough implying that recession stays relatively longer and economic revival is slow during recessionary phase.

Suggested Citation

  • Safia Shabbir, 2013. "Implications of Monetary Policy for Corporate Sector and Economic Growth in Pakistan," SBP Working Paper Series 61, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:61
    as

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    File URL: http://www.sbp.org.pk/repec/sbp/wpaper/wp61.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
    1. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
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    7. repec:onb:oenbwp:y::i:41:b:1 is not listed on IDEAS
    8. Ali Choudhary & Amjad Ali & Shah Hussain & Vasco J. Gabriel, 2012. "Bank Lending and Monetary Shocks: Evidence from a Developing Economy," SBP Working Paper Series 45, State Bank of Pakistan, Research Department.
    9. Safia Shabbir, 2012. "Monetary Transmission in Pakistan: The Balance Sheet Channel," Working Papers id:4916, eSocialSciences.
    10. José Sidaoui, 2003. "Implications of fiscal issues for central banks. Mexico's experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal issues and central banking in emerging economies, volume 20, pages 180-197, Bank for International Settlements.
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    12. Safia Shabbir, 2012. "Monetary Transmission in Pakistan: The Balance Sheet Channel," SBP Working Paper Series 49, State Bank of Pakistan, Research Department.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Shabbir, Safia & Iqbal, Javed & Hameed, Saima, 2013. "Risk Premium, Interest Rate Differential, and Subsidized Lending in Pakistan," MPRA Paper 48250, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary policy; monetary transmission; balance sheet channel; forecasting; profitability; economic growth;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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