Abstract:
The study investigates whether Pakistan's conventional banks create liquidity in response
to monetary policy. The secondary data is gathered from the Thomson Reuter financial data
streams. The annual time series data is collected from 2000 to 2021. Conventional banks create
liquidity by using liquid liabilities to finance illiquid assets. Ali & Ahmad (2022) estimated the
quantity of liquidity created by conventional banks in Pakistan over the past 21 years using the
Catfat model developed by Berger and Bouwman (2009). The current study used the estimated
amount to examine the impact ofmonetary policy on liquidity creation by using the simple linear
regression econometric model. The outcomes of the study indicate that monetary policy has a
significant positive impact on liquidity creation in Pakistan. By regulating the monetary policy
rate, the State Bank of Pakistan manages the amount of liquidity that conventional banks create.
The decisions made by the State Bank of Pakistan are crucial for the economic development of a
country. The future implication of the study is that several bank-specific and industry-specific
factors affect liquidity creation, so there is a need to explore the same in different regions ofthe
world.
