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Determinants of Interest Rate : Empirical Evidence from Pakistan

+,us,ba-,t +anwal
1
( .uneer /,med /bbasi
2
( "rof. Dr. /nwer Irs,ad 0urne1
)
( .u,ammad .ubin
*
2
1..0/( I34/ 5niversit1( +arac,i
2. 6ecturer( Department of 0usiness /dministration( 0ena7ir 0,utto S,a,eed 5niversit1( 61ari( +arac,i
)./ssociate "rofessor in Economics( 8ovt. National 9ollege( +arac,i
*.6ecturer in 9ommerce( 8ovt. Degree Science and 9ommerce 9ollege( 61ari( +arac,i
29orresponding /ut,or: Email: mubinamin;,otmail.com

Abstract
<,e main focus of t,is researc, stud1 will be to determine t,e main factors t,at influence interest rates and
different economic variables t,at cause interest rate to fluctuate in an econom1 in s,ort run. Different economic
indicators ,ave different impact on interest rates at a different pace. =ow t,ese indicators respond to different
economic situations and to w,at e>tent it brings c,anges in t,e rate of interest. <,e two selected and vastl1
adopted and acceptable indicator for calculating interest rate are 9"I and e>c,ange rates. <,ese two variables are
used in regression e?uation to indicate t,e effect and t,eir influence on our dependent variable i.e. Interest rate(
wit, t,e ,elp of software S"SS. @- Aears secondar1 data was ta-en from S0" and SE9" on mont,l1 basis from
2% to 21.<,e positive and a ver1 strong relations,ip ,as been found among t,e variables.
Keywords:+I0&4( 9"I( Interest rate( and Inflation

1. Introduction
1.1 Overview
Be ma1 not alwa1s reali7e it( but interest rates pla1 an important role in our ever1da1 lives and can greatl1
affect our bu1ing power. 9onse?uentl1( t,e overall trend of interest rates can ,ave a maCor effect on our
investments( t,us( as an investor it is important to pa1 close attention to different trends in interest rate. .aCor
s,ifts in direction( be increase or decrease( s,ould cause 1ou to review present investments as well as point
towards potential investment opportunities. Normall1 interest rate mean ever1t,ing stated b1 State 0an- of
"a-istan !from now onwards S0"# funds rate to an1 of t,e <reasur1 bill 1ields to t,e 1 1ear fi>ed deposit rate.
Since t,ese rates move toget,er( t,e term interest rate means an1 ban- lending rate. &r( interest rate means an1
rate a lender c,arge( as a percentage of t,e principal( to an1one w,o borrows or use an asset. Interest rates are
normall1 calculated on annual basis -nown as t,e annual percentage rate !/"4#. <,e assets t,at are borrowed
could include cas,( consumer goods( and assets suc, as car( building( and raw material. Interest rates control t,e
flow of mone1 in an econom1. Normall1 w,en interest rates are ,ig, in an econom1( it will control t,e inflation
rate but at t,e same time it ,as a negative impact on econom1 b1 slowing down t,e economic activities. B,ereas(
low interest rate speedup t,e economic performance but could lead to inflation in an econom1. So t,erefore( it is
not onl1 important to -eep an e1e on increase and decrease of interest rate but also to consider t,e different
reaction of ot,er economic indicators in an econom1. /s alread1 discussed in t,is stud1 about t,e importance of
interest rate( itDs ver1 important for 8overnment and Einancial institutes to get some e>tra information about t,e
variables t,at can affect interest rates to fluctuate. /not,er benefit t,at t,is article is going to provide( is to t,e
investors( before planning t,eir investment plan( t,e1 can get some bac-ground information about interest rates
determinants so t,at t,eir planning is done more efficientl1 and effectivel1. Different aut,ors conducted
numerous researc,es about interest rates and monetar1 polic1( ever1 researc, was mostl1 concerned wit, impact
of interest rate( w,at c,anges will bring interest rate in an econom1. <,is article is solel1 concerned wit,
determinants of interest rates.
1.2 Definition of KIBOR
+arac,i Inter 0an- &ffer 4ate !+I0&4# is a rate given b1 e>pert and speciali7ed institutions on wee-l1( mont,l1
and 1( 2 and ) 1earl1 basis to all t,e commercial ban-s of "a-istan to c,arge t,eir customers accordingl1.
+I0&4 is inflation adCusted rate( and ban-s add e>tra 2F to )F in +I0&4 to c,arge t,eir customers to earn
profit.
1.3 Definition of Inflation
4efers to an increase in general price level in a countr1 in a particular time period. &r inflation is generall1
considered as an inordinate rise in general prices in a countr1.
1.4 Definition of Exchange Rate
/n e>c,ange rate !also -nown as E&4EG rate( EG rate or Eoreign E>c,ange 4ate# is defined as t,e rate at w,ic,
one currenc1 is e>c,anged wit, anot,er currenc1. &r it is t,e value of one currenc1 in-term of anot,er currenc1.
Eor e>ample an inter-ban- e>c,ange rate of $@ "a-istani 4upee !4s 4upee# to 5nited State Dollar !5S H# means
5SH1 will be e>c,anged for eac, 4s $@.

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. Purpose!Aim of Researc"
<o stud1 t,e determinants of Interest 4ate.
2.1 Hypothei
=
1
: Inflation in an econom1 ,as a positive impact on interest rates.
=
2
: E>c,ange rate fluctuation ,as a positive impact on interest rates.

#. $I%RA%&RE RE'IE(
/ stud1 was conducted about t,e determinants of interest spread in "a-istan b1 +,awaCa and 5ddin !27# using
panel data of 2I ban-s. /n increase in interest spread implies t,at eit,er t,e depositor or t,e borrower or bot,
stand to lose. <,is paper e>plores t,e determinants of interest spread in "a-istan focusing in particular on suppl1
interest- insensitive deposits to t,e ban-s and industr1 concentration. /not,er issue addressed in t,e paper is t,e
growing trend towards .ergers and /c?uisition !.J/# in ban-ing industr1 t,at is driven in part b1 t,e recentl1
introduced 0asel /ccord 11 to w,ic, "a-istan is signator1. <o e>amine t,e determinants of interest spread for
"a-istanDs ban-ing industr1K t,e model used is "eria and .od1 !2*#. <,e result s,owed t,at in interest spread
t,ere is a maCor part of interest-insensitive deposit in t,e total ban- deposits. /part from t,at( t,e mergers among
different ban-s in t,e ban-ing industr1 also limited t,e options for t,e savers( w,ic, again adversel1 effected
interest spread. /not,er researc, was conducted in "a-istan to e>amine t,e pass-t,roug, of c,anges in <reasur1
bill rate to 9all .one1 rates( ban-s deposits rate and ban- lending rate b1 +,an and +,awaCa !27#. In t,is
paper it is tested w,et,er t,e c,anges in t,e <reasur1 bill rate are passed on to mone1 mar-et rate( ban- deposit
rate and t,e ban- lending rate and if 1es at w,at speed and to w,at e>tent. <,e t,ree main areas t,at were
discussed in t,is stud1 are degree of pass- t,roug, from mone1 mar-et or t,e polic1 rate to t,e deposit and
lending rates( t,e causes of stic-iness of depositLlending rates and finall1 to c,ec- is t,e pass-t,roug, s1mmetric
for upward and downward revision in mone1 mar-etLpolic1 rate. <,e met,od used to appl1 test in t,is stud1 was
simple /uto-regression Distributed 6ag !/D6# model. <,e result s,owed t,at t,e pass-t,roug, from mone1
mar-etL<-bill rate to depositLlending rate e>,ibit rigidit1. <,e causes of stic-iness include menu costs and
structural features of financial s1stem. <,e pass-t,roug, was as1mmetric for upward and downward revisions in
t,e polic1 rate. / paper regarding t,e global economic d1namics in w,ic, interest rate directive was subCect to
t,e lower bound b1 Evan !2$#. <,e monetar1 polic1 of central ban- follows a rule in w,ic, interest rate
responds more t,an one-for-one to deviate from t,e inflation rate from its target. <,e main focus of t,is paper is
to find out evidences t,at falling prices and falling output results in deflationar1 spirals. It is believed( t,e lower
bound on nominal net interest rates ,as t,e potential to generate M6i?uidit1 <rapN w,ic, is also -nown as <a1lor
4ule( wit, possibl1 maCor implications for economic performance. <,e model t,at is used is fairl1 standard
representative agent model along t,e lines of 0en,abib( 8ro,e( 5ribe !21#. Bit, t,e findings in t,is researc,
paper it was derived t,at t,e 7ero lower bound to interest rates ,as s,owed t,e sign of multiple e?uilibria and
li?uidit1 traps w,en monetar1 polic1 is formed using global <a1lor 4ule. /lam and Ba,eed !2@# conducted a
researc, on "a-istan regarding t,e sectoral or regional effects of monetar1 s,oc-s( different sectors or regions of
t,e econom1 respond differentl1 to monetar1 s,oc-s. <,is paper ta-es a first step in investigating t,e monetar1
transmission mec,anism in "a-istan at a sectoral level. <,ere are two possible levels of disaggregation of an
econom1( one at t,e level of final e>penditures and ot,er at t,e level of production. Due to data limitations(
,owever( t,is paper tends to focus on disaggregated data of sectoral production. <,e estimation of '/4 wit,
t,ree variable are used( t,e level of output( t,e level of prices( and a monetar1 polic1 indicator. It was concluded
t,at t,ere is a impulse response function to estimate t,e effects of monetar1 s,oc- on real activit1. /ustrian
article b1 Jobst and +wapil !2$# of interest rate pass-t,roug, in /ustria is about w,et,er t,e turbulence in t,e
financial mar-ets and t,e-according- to ban-s-resulting difficulties in raising funds in mone1 and capital mar-et
,as led to a difference in t,e pass-t,roug, of retail interest rates to mone1 mar-et interest rates. <,e
met,odolog1 t,at is used in t,is article is correlation and co integration relations,ip between lending rates and
t,e respective mar-et rates. Data was ta-en from mone1 mar-et interest rates( customer deposits( s,ort-term and
long term bonds and lending rates. <,is stud1 finds t,at t,ere ,as been a statisticall1 significant temporar1
c,ange in t,e relations,ip between mar-et and lending rates since Jul1 27 for some loan categories. <,ere was
no evidence t,at lending rates in /ustria ,ave been ,ig,er since t,e turbulence began t,an would be Custified b1
t,e pass-t,roug, of mar-et rates. =artman !1I$# in ,is stud1 e>amines t,e ?uestion of w,et,er long term or
s,ort term interest rates s,ould appear in investment demand functions. <,ree basic models were e>amined. <,e
first involves a distribution of time lags re?uired to complete investment proCectsK t,e second is based on a
simple adCusted-costs model: and t,e t,ird incorporates uncertaint1 and ris- aversion. <,eir maCor conclusion is
t,at( e>cept for some special cases w,ic, are probabl1 ?uite unrealistic( bot, long term and s,ort term interest
rates affect investment demand. In anot,er stud1( 9o>( Ingersall( and 4oss !1I$%# developed a e?uilibrium asset
pricing model to stud1 and understand interest rate structure. In t,is model it was determined t,at t,e bond prices
are effected b1 ris- aversion( preferences of consumption and investment alternatives. .an1 of t,ese factors
,ave an effect on t,e term structure of interest rate and in t,is manner are included in a wa1 w,ic, is full1
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uniform wit, rational e>pectation and ma>imi7ing be,avior. <,e model resulted in a specific formula for bond
prices and w,ic, are well-matc,ed for practical stud1 !p.)$%#. +andel( &fer( and Sarig !1II@# used nominal
bonds and prices of inde> and developed a tec,ni?ue to measure E>-/nte inflation adCusted interest rate. 5sing
t,is tec,ni?ue and wit, t,e ,elp of new data t,at was available t,e1 rig,t awa1 applied t,e Eis,er =1pot,esis
w,ic, sa1s t,at inflation is independent of real interest rate. <,eir result s,owed a negative relation between
inflation and E>- /nte interest rate. <,is result disagrees wit, Eis,er ,1pot,esis but relates wit, stud1 of <obin
J.undell( Darle1( and Eeldstein Stul7. Bit, t,e above results( t,e1 also found t,at inflation ris- w,ic, is
directl1 related to inflation uncertaint1 is included in nominal interest rate !p.2%#. /not,er stud1 was conducted
b1 6aubac, and Billiams !2)# on measuring t,e nature of natural rate of interest. <,e natural interest rate
w,ic, is also -nown as t,e real interest rate( is dependable wit, output e?uivalent also wit, t,e usual rate and
stead1 inflation( pla1s a vital role in macroeconomic studies and monetar1 polic1 e>pectation of real interest rate(
,owever( ,as gained a little attention. <,e1 used t,e +almer Eilter to calculate Jointl1 <ime 'ar1ing real interest
rates and different output wit, different pattern in growt, rate. <,e result s,owed a close relation between t,e
real interest rates and different patterns in growt, rate( as alread1 e>pected b1 t,eor1. <,e calculation of real
interest rate was ver1 inaccurate and subCected to significant errors in measurements !p.1@)#. 0arro and .artin
!1II# began t,eir stud1 wit, t,e c,allenge to e>plain w,1 real interest rates were so ,ig, in t,e 1I$s in t,e
maCor industriali7ed countries. In order to address t,is c,allenge t,e1 e>pended t,e ?uestion to t,e determination
of real interest rates over a longer sample( w,ic, turned out to be 1I%7-1I$$. In considering ,ow real interest
rates were determined t,e1 focused on t,e interaction between investment demand and desired saving in an
econom1 ! ten &E9D countries viewed as operating on an integrated capital mar-et# t,at was large enoug, to
Custif1 closed econom1 assumption. Bit,in t,is MworldN setting( ,ig, real interest rates reflect positive s,oc-s to
investment demand !suc, as improvements in t,e e>pected profitabilit1 of investment# or negative s,oc-s to
desired saving !suc, as temporar1 reduction in world income#. <,eir main anal1sis ends up measuring t,e first
-ind of effect mainl1 b1 stoc- returns and t,e second -ind primaril1 b1 oil prices and monetar1 growt,. &-ina
!1III# conducted a stud1 on Japanese econom1 and tries to e>plain ?uestions regarding w,1 0an- &f Japan
!0&J# doesnDt adopt inflation targetingO( w,1 ,as t,e 0&J stubbornl1 refused to increase t,e outrig,t purc,ase of
long term government bondsO. <,is stud1 tries to evaluate ?uestions and criticism regarding t,e conduct of t,e
0&JDs monetar1 polic1 under 7ero inflation b1 using t,e following two criteriaK !1# t,e 0&J will ta-e measures
necessar1 to ac,ieve t,e sound development of t,e national econom1 t,roug, t,e pursuit of price stabilit1 in
long runK ,owever( !2# t,e 0&J will not ta-e suc, measures if t,e side effects are demand greater t,an t,e effects(
w,ic, ma-es it difficult to ac,ieve t,e obCective in !1#. EuCi-i( =siao( and S,en !22# used annual Japanese
prefecture date on income( population( demand deposits( and saving deposits from 1II2 to 1II7 to investigate
t,e issue of w,et,er t,ere e>ists a stable mone1 demand function under t,e law of interest rate polic1. <,is
evidence appears to support t,e contention t,at t,ere does e>ist a stable mone1 demand function wit, long run
income elasticit1 greater t,an one for . 2 and less t,an one for . 1. Eurt,ermore( t,e1 found t,at JapanDs
mone1 demand is sensitive to interest c,anges. =owever( t,ere was no evidence of t,e presence of li?uidit1 trap.
Interest rates for rural and unorgani7ed mone1 mar-ets in t,ird world societies ,ave not 1et been e>tensivel1
studied. 0ottemle1 !1I7%# used compre,ensive review of agricultural credit literature to e>plore t,e relations,ips
between t,e costs of e>tending credit( amounts loaned( and borrowerDs abilit1 to absorb furt,er capital. =ig,
costs in administering small loans and resistance to repa1 suggest t,e convenience of lin-ages between lending
agencies and mar-eting boards for t,e crops upon w,ic, loans were made. 'illage mone1 lenders-cum-traders
ma1 be able to operate more efficientl1 t,an public agencies( particularl1 w,en trained staff was in s,ort suppl1.
In anot,er stud1 +,at-,ate !1I$$# underscores t,e difficulties of measuring t,e level of real interest rates and
suggests an alternative to appro>imate real interest rates in 6ess Developed 9ountries !6D9s#. <,e rationale for
doing so lies in t,e fact t,at t,ere needs to be a reasonable relations,ip between domestic nominal interest rate
and adCusted foreign interest rate since( even in 6D9s wit, trade and e>c,ange controls( domestic currenc1 and
financial assets were alwa1s substituted( legall1 or ot,erwise( for foreign currenc1 and financial assets. "attanai-
and .itra !21# conducted a stud1 on MInterest rate defence of e>c,ange rate: <ale of Indian rupeeN. B,ile t,e
rationale for raising t,e interest rate to defend an e>c,ange rate under speculative attac- is well grounded in
economic and financial t,eories( empirical validation of t,e effectiveness of suc, a polic1 stance ,as generall1
been difficult and is s,rouded wit, conflicting findings. In India( besides fore> mar-et interventions and use of
several administrative measures( t,e 4eserve 0an- of India ,as occasionall1 resorted to t,e ,ig, interest rate
option during maCor episodes of significant pressures on t,e e>ternal value of t,e rupee. /n empirical assessment
suggests t,at one standard deviation s,oc- to t,e call rate leads to rupee appreciation in t,e ver1 second mont,.
Similarl1( for one standard deviation s,oc- to net interventions( t,e e>c,ange rate appreciates graduall1 b1 a few
paise over five mont,s. <,e impulse response also suggests t,at in response to one standard deviation s,oc- t,e
e>c,ange rate appreciates b1 about $ paise in t,e second mont,( but subse?uentl1 t,e e>c,ange rate depreciates
graduall1( more t,an offsetting t,e initial impact of t,e ,i-e in interest rate. In anot,er stud1 .ariscal and
=owells !22# tr1 to address t,e issue regarding t,e central ban- i.e 0an- of England and its different policies.
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Eirst on( t,e interaction between official and mar-et rate. In t,eir stud1( t,e1 used vector autoregressive error
correction model to e>plore t,e response to c,anges in t,e central ban- rate of t,ree s,ort term mar-et rates t,at
,ave been featured previousl1 in t,eir Cournal in debates about t,e demand for endogenous mone1. In t,e ne>t
section t,e1 loo- at w,at sort of response t,e aut,orities mig,t li-e to ,ave in an ideal world. <,e1 s,owed first
t,at a direct and proportionate lin- between official rate and mar-et rates is not necessaril1 w,at is wanted( and
w,at is almost certainl1 re?uired is a comple> set of c,anges in relative rates. <,e result s,owed t,at t,ere is a
long-run relations,ip between t,ree -e1 rates and t,e level of official rates since 1I$@ w,ic, ma-es it difficult
for t,e 0an- of England to induce lasting c,anges in relative rates. Iwata !21# in ,is stud1 attempt to
investigate t,e latter issue( and in particular( to empiricall1 e>amine t,e effect of monetar1 polic1 on t,e term
structure of interest rate w,en nominal s,ort-term rates are close to 7ero( using Japanese data in t,e 1IIs and
earl1 2s. It was found t,at w,en t,e polic1 s,ort rate is alread1 7ero interest rate periods( an e>pansionar1
monetar1 polic1 was suggested to down longer rates( alt,oug, t,e effect is muc, wea-ened relative to t,e
nominal time. /n empirical anal1sis for "a-istan was conducted b1 .u-,tar and Pa-aria !27# regarding
budget deficit and interest rates. <,e1 empiricall1 e>amined long-run relations,ip between nominal interest rates
and budget deficits for "a-istan using ?uarterl1 time-series data for t,e period 1I@ to 2%. <,e1 tested t,e
Mcrowding-outN view against t,e M4icardian deficit neutralit1N alternative. 4egression result s,owed t,at budget
deficit do not ,ave significant effect on nominal interest rates. <,ese result revealed t,e e>istence of t,e
4icardian Deficit Neutralit1 in "a-istan. B,ile budget deficit-8D" ratio ,as significant positive impact on
nominal interest rates. <,ese findings support t,e conventional wisdom of 9rowding-&ut. <,e results were also
validated b1 t,e 8ranger 9ausalit1 tests. <,e t,eor1 of interest ,as been in controversial for a long time in
economics and t,e determination of t,e interest rate still gives rise to more disagreements among economists
t,an an1 ot,er branc, of general economic t,eor1. So 4oos and S7elis-i !2)# attempt to answer some of t,e
?uestions wit, t,eir stud1 on t,e determination of interest rates. <,e stud1 s,owed t,at t,e important factors
affecting interest rates are !a# t,e mone1 suppl1 or li?uidit1-asset suppl1( w,ic, is largel1 demand deposits( !b#
t,e business demand for funds measured b1 t,e volume of new orders being placed wit, business in relation to
t,e wor-ing capital of corporations( !c# t,e securit1 mar-ets demand for funds( !d# t,e government for funds( !e#
t,e ban-sD abilit1 to e>tend credit and !f# t,e suppl1 of bonds outside of government agencies. 8nan( Sc,arler
and Silgoner !2)# in t,eir stud1 t,e1 first tr1 to find and evaluate t,e possibilit1 of future inflation occurrence
and also to c,ec- different constituencies of central ban-. In t,e second part of t,eir stud1 t,e1 tr1 to find not
onl1 long term inflation but also to calculate medium term inflation( w,ic, is normall1 less t,an % 1ears. /nd
lastl1 to e>amine w,et,er or not t,ere are measures of empirical inflation w,ic, could dissolve in an1 concept
re?uirement. <,eir stud1 empiricall1 suggested t,at t,e c,anges in inflation e>pectation were caused b1 actual
inflation c,anges. /nd t,ese c,anges were maCorl1 caused b1 measures ta-en b1 financial mar-ets( not b1
consumer e>pectation of inflation.

). RE*EAR+, -E%,.D*
4.1 !etho" of Data #ollection
/ll data w,ic, was used in m1 researc, would be collected t,roug, secondar1 sources includes State 0an- of
"a-istan !S0"# and Securit1 and e>c,ange commission of "a-istan !SE9"#.
4.2 $a%pling &echni'(e
Secondar1 data will be used and total information will be collected from secondar1 sources.
4.3 $a%ple $i)e
@- Aears data was ta-en from S0" and SE9" on mont,l1 basis from 2% to 21.
4.4 Intr(%ent of "ata collection
<,is researc, is totall1 based on secondar1 data. No an1 instrumentLprimar1 data was used in m1 researc,.
4.* $tatitical &echni'(e
In m1 researc, I used .ultiple 6inear regression !.64#. .ultiple linear regression is a statistical model w,ic,
e>amines t,e relations,ip between two or more e>planator1 variables and a response variable b1 fitting a linear
e?uation to observed data.

1
Q

R
1
x
1
R
2
x
2
R ... R
p
x
p
<o e>amine t,e data t,e data Statistical "ac-age for t,e Social Sciences !S"SS# software is used.
<,e e?uation of m1 model is following:
A Q 2.$@* R .11@G
1
- .)7G
2

B,ere(
AQ +arac,i inter-ban- offer rate !+I0&4#
G
1
Q9"I
G
2
QE>c,ange 4ate

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/. RE*&$%* A0D I-P$I+A%I.0*
<,e data of @ 1ear mont,l1 average was ta-en from State 0an- of "a-istan and Securit1 and E>c,ange
9ommission of "a-istan of +I0&4( Inflation !9"I# and e>c,ange rate. <,e statistical tec,ni?ue t,at was stud1
for t,is stud1 was .ultiple 6inear 4egression !.64#. <,is stud1 tends to focus on t,e impact of inflation and
e>c,ange rate on +I0&4. /nd data e>amination was done wit, t,e ,elp of Statistical "ac-age for Social
Sciences !S"SS#.
*.1 +in"ing an" Interpretation of the re(lt
.1 researc, is based on ) variables.
+I0&4Q Dependant 'ariable
9"IQ Independent 'ariable
EG9=/N8E 4/<EQ Independent variable
-odel *ummary
.odel 4 4 S?uare /dCusted 4 S?uare Std. Error of t,e Estimate
1 .$I)
a
.7I7 .7I1 .I77*I
a. "redictors: !9onstant#( EG4<( 9"I
b. Dependent 'ariable: +I0&4
<,e co efficient of determination !4
2
# is 7I.7F. <,is e>plains t,at t,e variation in +I0&4 wit, respect to
9"I and E>c,ange 4ate is up to 7I.7F.

A0.'A
b

.odel Sum of S?uares df .ean S?uare E Sig.
1
4egression 2%I.))$ 2 12I.@@I 1)%.711 .
a

4esidual @%.I2$ @I .I%%
<otal )2%.2@@ 71
a. "redictors: !9onstant#( EG4<( 9"I
b. Dependent 'ariable: +I0&4

<,e value of E-statistic is 1)%.711 w,ic, is ,ig, and t,e p-value is . w,ic, is less t,an .% !level of
significance# t,is implies t,at t,e test of /N&'/ is significant and t,e model is valid from t,e given predictors.
=ere t,e significance value !t,e p-value# is less t,an .% w,ic, means t,at t,e constant term as well as t,e
coefficient of independent variables is significant for model. <,e overall researc, result s,ows t,at t,ere is a
positive impact of inflation !9"I# and E>c,ange rate on +I0&4.
*.2 Hypothei ,e%ent $(%%ary
No. =1pot,esis 0eta /cceptL4eCect
1 Inflation in an econom1 ,as a positive impact on
interest rates.
.**% /ccept
2 E>c,ange rate fluctuation ,as a positive impact on
interest rates.
.%@1 /ccept

+oefficients
.odel
5nstandardi7ed 9oefficients
Standardi7ed
9oefficients
t Sig.
9ollinearit1 Statistics
0 Std. Error 0eta <olerance 'IE
1
!9onstant# 1.%7) .7@@ 2.%) .**
9"I .1$ .27 .**% @.7* . .@7% 1.*$1
EG4< .1I .1) .%@1 $.%1* . .@7% 1.*$1
a. Dependent 'ariable: +I0&4
Journal of Economics and Sustainable Development www.iiste.org
ISSN 2222-17 !"aper# ISSN 2222-2$%% !&nline#
'ol.%( No.1)( 21*

)
1. DI*+&**I.0*2 I-P$I+A%I.0*2 3&%&RE RE*EAR+, A0D +.0+$&*I.0*
In t,is stud1 data of mont,l1 rates was collected from State 0an- of "a-istan !S0"# and Securit1 and E>c,ange
9ommission of "a-istan !SE9"# for dependant variable +I0&4 and independent variables( inflation and
e>c,ange rate from 2% to 21 and t,e statistical tec,ni?ue t,at was used to e>amine t,e data was .ultiple
6inear 4egression !.64#. S"SS was used along wit, .ultiple linear 4egression to evaluate t,e impact of t,e
independent variables i.e. inflation and e>c,ange rate on dependent variable +I0&4.
-.1#oncl(ion
<,is researc, stud1 concludes t,at among t,e two independent variables inflation and e>c,ange rate bot,
e>c,ange rate and inflation !9"I# ,as a positive relations,ip wit, t,e dependent variable +I0&4. So we can
conclude t,at an increase in inflation !9"I# and e>c,ange rate will result in an increase in +I0&4 and a decrease
in inflation !9"I# and e>c,ange rate will reduce +I0&4.
-.2 I%plication an" .i%itation
It is ver1 important for 8overnment and Einancial institutes to get some e>tra information about t,e variables
t,at can affect interest rate to fluctuate. Investors and financial institutions can anal17e and observe t,e be,avior
of +I0&4 more effectivel1 and efficientl1 wit, t,e ,elp of t,is stud1. B,ereas limitations are concerned t,is
stud1 ,as few limitations( out of numerous factors t,at can determine +I0&4 onl1 few of t,ose are ta-en into
account due to t,e s,ortage of time availabilit1 and some securit1 ris-s involved.
-.3 Reco%%en"ation
<,is stud1 was limited to onl1 two factors t,at affect +I0&4 w,ereas t,ere can be more t,an two factors w,ic,
can affect +I0&4. <,e data was ta-en for onl1 @ 1ears from 2% to 21 but researc, can also be conducted for
longer time period.

References
+,an( /.3. J +,awaCa !27#. Interest rate pass-t,roug, in "a-istan: Evidence from transfer function approac,:
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Economy.
Evan( 8.E !2$# .onetar1 and fiscal polic1 under learning in t,e presence of a li?uidit1 trap: Monetary and
Economic Stdies.
+,awaCa ..I J 5ddin !27# Determinants of interest spread in "a-istan: The Pakistan Development Review.4!(
12IS1*).
/lam( <JBa,eed !2@# Sectoral effects of monetar1 polic1: Evidence from "a-istan: The Pakistan
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0arro( 4.J J .artin !1II#. Borld real interest rate.,hica-o #ornals. "( 1%-@1.
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data anal1sis.Monetary and the economy.
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