Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis.

Muhammad Arshad Khan, Ayaz Ahmed

Abstract


This study examines the transmission channels through which
the global food and oil price shocks affects selected macroeconomic
variables including inflation rate, output, money balances, interest
rate and real effective exchange rate for Pakistan using monthly data
over the period 1990M1-2011M7. An empirical analysis is carried out by
employing structural vector autoregressive (SVAR) framework. Generalised
Impulse Response Functions and Generalised Forecast Variance
Decompositions are employed to track the impact of oil and food price
shocks to Pakistan‘s economy. Results suggest that oil price shock
affects industrial production, appreciates real effective exchange rate
negatively and affect inflation and interest rate positively. Whereas,
following food price shocks, industrial output increases. Similarly,
interest rate and inflation rate responds positively following food
price shocks. However, the variation in interest rate due to food price
shock is relatively larger than that of oil price shocks. Generalised
impulse response functions reveal that real effective exchange rate is
most important source of disturbances following either oil price or food
price shocks. Generalised forecast variance decompositions analysis also
supports the findings based on generalised impulse response functions.
The result clearly reveals that oil and food price shocks significantly
affect output, short-term interest rate, inflation rate and real
effective exchange rate. However, among all, real effective exchange
rate has seen a dominant source of variations in Pakistan. This implies
that supply-side and demand-side disturbances originated by external
shocks are the major sources of inflation (stagflation) in Pakistan.
Keywords: Oil and Food Price Shocks, SVAR, GIRFs, GFEVDs,
Pakistan

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DOI: https://doi.org/10.30541/v50i4IIpp.491-511

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