Volatility in real interest rate in the Pakistan economy: A regime switching approach

Fahad J. Malik and Mohammed Nishat

First published: 20 April 2018


This paper assesses the volatility of short term real interest rate in Pakistan using Markov's switching model drawing on monthly data from January 1964 to March 2016. This model holds that if the random walk pattern is not visible in the real interest rate series, fluctuation in the series are temporary and the interest rate will be restored around the mean value eventually. The results reveal that the real interest in Pakistan has exhibited high volatility from 1973 onwards and continued to stay in the high variance regime, due to the instability of Pakistan's economic conditions and high budget deficits.

Keywords: Interest rate, Volatility, Markov switching model

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