ESSAYS ON MONEY AND FINANCE: THE CASE OF SELECTED SOUTH ASIAN COUNTRIES

Author

Hasan Muhammad Mohsin, Southern Illinois University CarbondaleFollow

Date of Award

12-1-2010

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Gilbert, Scott

Abstract

This dissertation consists of three research studies on capital flows to South Asian countries, estimation of interest rate pass through in Pakistan and the relative city price convergence in Pakistan. The study has used panel data techniques for empirical estimations. The first study attempts to estimate capital mobility in South Asia using saving investment relationship technique and real interest rate differentials methods as suggested by Frankel (1992). The study finds that real interest rate differentials of South Asian countries are stationary and mean reverting with North American, European and Asian countries. Although the RIDS are stationary showing strong evidence of capital mobility, the savings investment correlation is significant. The correlation of savings and investment decreased after 1990s, the post liberalization period implying increased capital mobility afterwards. The RIDs technique provided stronger evidence of than savings and investment correlation technique. The second study is on the estimation of interest rate pass through in Pakistan using two types of data sets i.e. aggregate bank type and retail bank data. The study finds that both lending, deposit and Treasury Bill (TB) rates are non stationary using aggregate data. The lending and TB rate are found to be cointegrated but deposit rate is not found to be cointegrated. The IRPT of four types of banks is found to be less than 1 but three banks showed the IRPT to be higher than 0.5. The highest IRPT is 0.72 in the case of nationalized banks followed by o.70 by privatized banks. The foreign banks IRPT are 0.60. The lowest IRPT is estimated at 0.3. The error correction model estimates overall IRPT to be 0.6 and the convergence parameter is 0.05. It is low and implies that convergence takes time. The study does not find change in 2005 after January 2005 but the speed of adjustment increased when the lending rate is below equilibrium. The retail data provides evidence that lending and deposit rates both are non stationary and cointegrated with TB rate. I found evidence of complete lending rate pass through with Spatial GLS but Phillips Loretain (1991) model shows incomplete pass through. The deposit rate is found to be incomplete and sticky with both the techniques. The third essay provides evidence on relative city price convergence in 35 Pakistani cities with 2 numeraire cities of Lahore and Karachi. The study estimates the autocorrelation coefficient with 2 techniques i.e. OLS and Spatial GLS. Furthermore city wise half life of price shock is also estimated. The empirical evidence supports the hypothesis of convergence in Pakistani cities with both the numeraire cities. The overall half life is estimated to be less than 6 months but there is found heterogeneity in the city wise half life estimates. The half life estimates from Spatial GLS are found to be lower than OLS. The convergence has been found even in the case of distant bordering cities. The overall results support that domestic Purchasing Power Parity holds in Pakistan.