Monetary Policy, Macroprudential Policy Intervention, and Financial Stability: A Moderated Empirical Analysis of Pakistan

This study empirically investigates the impact of traditional monetary policy and the moderating role of macroprudential policy on Pakistan’s financial stability. Panel data (2008–2023) of top 20 banks were examined with Hausman test, fixed, and random-effects models. The study assesses financial stability through bank performance (ROA, ROE,NIM) and risk indicators (z-score, LLP). The independent variables include discount rate and inter-bank offer rate. The findings indicate that tight monetary policy improves banks performance as it enhances ROE, however it has no impact on banks ROA and NIM. In addition, monetary policy doesn’t have any impact on bank default risk i-e z-score, however, tight monetary policy reduce LLP hence enhances bank asset quality. Moderation analysis finds that macroprudential policy reduces NIM hence depress banks performance, although it has no moderating effect on bank risk. The monetary policy exerts a positive influence on banks’ profitability and asset quality, whereas macroprudential policy tends to suppress bank performance. Hence, monetary policy instruments are more effective than macroprudential policy for financial stability.