Impact of bank withdrawals taxation on cash holdings, interest rates, inflation and bank deposits: Empirical evidence from Pakistan

Abstract

To avoid debt burdens and to meet budgetary expenditure within internal resources leads to introduction of bank withdrawal taxation in Pakistan. The research has been carried out to empirically investigate the impact of bank withdrawal taxation on cash holdings, bank deposits, inflation, borrowing and lending rates. The withdrawal taxation was imposed in 2006 therefore the study analysis period has been from 2006 to 2014. The complex relationship among variables leads to analyze the data through VAR. The empirical findings through Vector auto regression (VAR) and impulse response suggests the presence of disintermediation in Pakistani economy. The disintermediation in the economy is captured through the study findings that there is increase in the cash holdings during the study period and reduction in bank deposits. The monetary variables such as inflation, borrowing and lending rates are reduced due to imposition of bank withdrawal taxation.