40-48

• Badar, Munib
• Javid, Atiya Yasmin

This study assesses long and short run dynamics between nonperforming loans and macro economic variables covering the period from January 2002 till December 2011 of commercial banks in Pakistan. Macroeconomic variables include inflation, exchange rate, interest rate, gross domestic product and money supply. A long run relationship is found among variables by employing Johansen and Juselius multivariate cointegration. While pair wise bivariate cointegration reveals pair wise long run relationship between nonperforming loans with money supply and interest rate. Granger causality test is used to evaluate the cause and effect relationship within the sample. It reveals inflation and exchange rate granger caused Nonperforming loans. Short run dynamics is explored by vector error correction model. It provides that weak short run relationship exist between Nonperforming loans with inflation and exchange rate. Macroeconomic indicators are the sizeable determinants of nonperforming loans. This research also sensitizes policy makers to cater for impact of aggravating economy on non performing loans. If not attended to is likely that it may hurts profitability and overall health of financial system while formulating fiscal and monetary measures.

• Economics and Business
• Computer and information sciences

• Macroeconomics
• Finance
• Statistics

inflation, exchange rate, interest rate, gross domestic product, money supply, nonperforming loans, cointegration

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