Antecedents and Consequences of Interest Rate Spread: Case of Pakistan

Abstract

Interest rate spread plays a crucial role in the monetary policies of the government and has a substantial impact on the economy. This article examines the bank-specific determinants of interest rate spread which include capital adequacy ratio, non-performing loans, and overhead expenses. To analyze the impact of Interest Rate Spread (IRS) on the economy, specifically, change in GDP growth rate, change in the inflation rate, change in industrial growth rate, change in foreign exchange reserves, and change in the stock market index, while ROA, ROE, and NIM are used as profitability measures of the banking sector. Data from 2011-2020 is collected and analyzed through a linear regression model, which gives significant results as twenty-two out of twenty-four hypotheses are accepted. These results will help policymakers to better formulate monetary policies and will provide the basis for new insight into IRS.