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Oil Price Shocks, Systematic Monetary Policy and Economic Activity

Author

Listed:
  • Muhammad Zeshan

    (Pakistan Institute of Development Economics, Islamabad)

  • Wasim Shahid Malik

    (Quaid-i-Azam University, Islamabad)

  • Muhammad Nasir

    (Pakistan Institute of Development Economics, Islamabad)

Abstract

This study quantifies the impact of oil price shocks and the subsequent monetary policy response on output for Pakistan. It employs a quarterly Structural Vector Auto-regression framework for the period 1993–2015. It first discovers that Hamilton’s (1996) Net Oil Price Increase indicator appropriately reveals most of the oil price shocks hitting Pakistan’s economy. We find that a contractionary monetary policy, resulting from the oil price shocks, contributes to significant output loss in Pakistan. After encountering the Lucas critique, the present study finds that around 42 percent of the output loss is due to the ensuing tight monetary policy. This suggests that the central bank of Pakistan can reduce the impact of oil price shocks by reducing its intervention in the market.

Suggested Citation

  • Muhammad Zeshan & Wasim Shahid Malik & Muhammad Nasir, 2019. "Oil Price Shocks, Systematic Monetary Policy and Economic Activity," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 58(1), pages 65-81.
    • Handle: RePEc:pid:journl:v:58:y:2019:i:1:p:65-81
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    File URL: http://www.pide.org.pk/pdf/PDR/2019/Volume1/65-81.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Oil Price Shocks; Monetary Policy; Structural Vector Autoregression;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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