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Abstract The present study aims to examine the complex interplay between monetary policy and banks' credit provision in Pakistan. Monetary policy is a fundamental instrument central banks utilize to manage the money supply and control credit availability. It holds significant importance in influencing economic stability and fostering growth. This study examines multiple dimensions of the relationship mentioned above, encompassing the influence of interest rates, reserve requirements, and open market activities on banks' loan supply. The study utilizes panel data analysis to investigate a comprehensive set of bank-specific features and macroeconomic variables spanning 2005 to 2021. The study examines the impact of a restrictive monetary policy on the provision of credit by banks, providing insights into the relationship between central bank policies and lending practices. The outcomes of this study indicate that monetary policy exerts a substantial influence on banks' loan supply. Elevated interest rates tend to diminish the accessibility of credit, whilst reduced rates incentivize the provision of loans. Furthermore, it has been demonstrated that alterations in reserve requirements and open market operations have a discernible impact on the loan supply dynamics of banks. Moreover, the research underscores the significance of various variables, including the size of banks, their liquidity levels, capital adequacy, profitability, credit risk, and debt-to-equity ratios, in influencing the accessibility of credit. Macroeconomic factors, such as economic growth and inflation, significantly affect the propensity of banks to provide loans. In summary, this study highlights the complex relationship between monetary policy and the provision of credit by banks, highlighting the importance of central banks carefully adjusting policy tools to promote financial stability and facilitate economic goals. The results of this study offer significant insights for policymakers and financial institutions in Pakistan and add to the larger comprehension of the transmission mechanism of monetary policy on bank lending. Jel classification: A1, E3, E6, G28, E58
Nasir Munir (Thu,) studied this question.