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Climate Change, Exchange Rate, Twin Deficit, and Energy Inflation: Application of VAR Model

Author

Listed:
  • Shazia Kousar

    (Department of Economics, Lahore College for Women University, Lahore 54000, Pakistan)

  • Saeed Ahmad Sabir

    (Hailey College of Commerce, University of the Punjab, Lahore 54000, Pakistan)

  • Farhan Ahmed

    (Department of Economics and Management Sciences, NED University of Engineering and Technology, Karachi 75270, Pakistan)

  • Štefan Bojnec

    (Faculty of Management, University of Primorska, SI-6101 Koper-Capodistria, Slovenia)

Abstract

The motivation behind the study is continuous fluctuations in energy prices in Pakistan, so this study aims to investigate the role of a twin deficit, urbanization, climate change, energy production from oil and gas, and the exchange rate in energy inflation. This study utilized oil prices and electricity prices to capture energy inflation using time series data from 1972 to 2021, from World Development Indicators (WDI) and the Census of Electricity Establishment (CEE). This study utilized the vector auto-regressive (VAR) model to investigate the short-run and long-run estimates. This study found that the twin deficit and the exchange rate have a significant and positive association with energy inflation. However, the size impact of the twin deficit is greater on oil prices as compared to electricity prices. Furthermore, urbanization, climate change, and energy production from oil and gas have a positive and significant long-run association with electricity prices. Moreover, the results of the variance decomposition test indicate that the relative contribution of the budget deficit in electricity prices (Model 1) is greater than other modeled variables, while the relative contribution of the budget deficit and climate change is greater in oil prices (Model 2), as compared to other exogenous variables. This study helps policymakers to devise policies to control energy inflation, which affects the well-being of society.

Suggested Citation

  • Shazia Kousar & Saeed Ahmad Sabir & Farhan Ahmed & Štefan Bojnec, 2022. "Climate Change, Exchange Rate, Twin Deficit, and Energy Inflation: Application of VAR Model," Energies, MDPI, vol. 15(20), pages 1-21, October.
    • Handle: RePEc:gam:jeners:v:15:y:2022:i:20:p:7663-:d:945036
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