A Structural Model of Pakistan’s Monetary Sector

The purpose of this study is to present an econometric model which is a formal representation of the structural relationships of the monetary sector of Pakistan. Two previous studies by Porter [15] and Snyder [16] should be noted in this regard. The study by Porter consists of an excellent survey of the portfolio behavior of the scheduled banks* in Pakistan, yet it could hardly be categorized as a quantitative work in the sense of establishing formal empirical relationships. On the other hand, the study by Snyder constitutes a quantitative work in the above sense reflecting the behavioral responses of the scheduled banks with respect to their various assets and liabilities. The main limitations of the latter work, as admitted by the author himself, emerge from its lack of consideration of the process by which the State Bank2, the scheduled banks, and the private sector determine money supply in Pakistan. The present study is intended as a modest attempt at filling both these caveats.