IDEAS home Printed from https://ideas.repec.org/p/sbp/wpaper/110.html
   My bibliography  Save this paper

Does the source of the oil price shock matter for inflation in Pakistan: Implications for monetary policy

Author

Listed:
  • Naafey Sardar

    (State Bank of Pakistan)

  • Zulfiqar Hyder

    (State Bank of Pakistan)

Abstract

Using local projections method on sample period 2002-2021, this paper analyzes the response of inflation in Pakistan to global oil price shocks, as identified in Kilian (2009). We find significant differences in the impact of oil prices driven by supply and demand factors on administered fuel prices, and other inflation measures. Oil demand shocks in Pakistan are more inflationary than oil supply shocks due to the presence of the administered domestic petroleum price mechanism. Evidence suggests that policy-makers were able to correctly identify the nature of the oil shock on most occasions, and adjust the administered fuel prices accordingly. Our results have important implications for monetary policy in Pakistan, as we find that purging of oil supply and demand shock matters for monetary policy formulation in case of a transitory supply shock.

Suggested Citation

  • Naafey Sardar & Zulfiqar Hyder, 2022. "Does the source of the oil price shock matter for inflation in Pakistan: Implications for monetary policy," SBP Working Paper Series 110, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:110
    as

    Download full text from publisher

    File URL: https://www.sbp.org.pk/publications/wpapers/2022/wp110.pdf
    File Function: First version, 2022
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Sardar, Naafey & Sharma, Shahil, 2022. "Oil prices & stock returns: Modeling the asymmetric effects around the zero lower bound," Energy Economics, Elsevier, vol. 107(C).
    2. Chandranath Amarasekara & Rahul Anand & Kithsiri Ehelepola & Hemantha Ekanayake & Vishuddhi Jayawickrema & Sujeetha Jegajeevan & Csaba Kober & Tharindi Nugawela & Sergey Plotnikov & Adam Remo & Poongo, 2018. "An Open Economy Quarterly Projection Model for Sri Lanka," IMF Working Papers 2018/149, International Monetary Fund.
    3. Shahzad Ahmad & Farooq Pasha, 2015. "A Pragmatic Model for Monetary Policy Analysis I: The Case of Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 11, pages 1-42.
    4. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    5. Lutz Kilian & Cheolbeom Park, 2009. "The Impact Of Oil Price Shocks On The U.S. Stock Market," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1267-1287, November.
    6. Volpe, Richard & Leibtag, Ephraim S. & Roeger, Edward, 2013. "How Transport Costs Affect Fresh Fruit and Vegetable Prices," Economic Research Report 161355, United States Department of Agriculture, Economic Research Service.
    7. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Modeling fluctuations in the global demand for commodities," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 54-78.
    8. Atems, Bebonchu & Sardar, Naafey, 2021. "Exploring asymmetries in the effects of El Niño-Southern Oscillation on U.S. food and agricultural stock prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 1-14.
    9. Pizzuto, Pietro, 2020. "Regional effects of monetary policy in the U.S.: An empirical re-assessment," Economics Letters, Elsevier, vol. 190(C).
    10. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sardar, Naafey & Sharma, Shahil, 2022. "Oil prices & stock returns: Modeling the asymmetric effects around the zero lower bound," Energy Economics, Elsevier, vol. 107(C).
    2. Zhang, Zhikai & Wang, Yudong & Xiao, Jihong & Zhang, Yaojie, 2023. "Not all geopolitical shocks are alike: Identifying price dynamics in the crude oil market under tensions," Resources Policy, Elsevier, vol. 80(C).
    3. Qian, Chenqi & Zhang, Tianding & Li, Jie, 2023. "The impact of international commodity price shocks on macroeconomic fundamentals: Evidence from the US and China," Resources Policy, Elsevier, vol. 85(PB).
    4. Lin, Boqiang & Bai, Rui, 2021. "Oil prices and economic policy uncertainty: Evidence from global, oil importers, and exporters’ perspective," Research in International Business and Finance, Elsevier, vol. 56(C).
    5. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    6. Maghyereh, Aktham & Abdoh, Hussein, 2021. "The effect of structural oil shocks on bank systemic risk in the GCC countries," Energy Economics, Elsevier, vol. 103(C).
    7. de Medeiros, Rennan Kertlly & da Silva Bejarano Aragón, Edilean Kleber & Besarria, Cássio da Nóbrega, 2023. "Effects of oil market sentiment on macroeconomic variables," Resources Policy, Elsevier, vol. 83(C).
    8. Nonejad, Nima, 2020. "Crude oil price volatility and equity return predictability: A comparative out-of-sample study," International Review of Financial Analysis, Elsevier, vol. 71(C).
    9. Aktham I. Maghyereh & Osama D. Sweidan, 2020. "Do structural shocks in the crude oil market affect biofuel prices?," International Economics, CEPII research center, issue 164, pages 183-193.
    10. Jochen H. F. Güntner & Katharina Linsbauer, 2018. "The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(7), pages 1617-1644, October.
    11. Lutz Kilian & Xiaoqing Zhou, 2023. "The Econometrics of Oil Market VAR Models," Advances in Econometrics, in: Essays in Honor of Joon Y. Park: Econometric Methodology in Empirical Applications, volume 45, pages 65-95, Emerald Group Publishing Limited.
    12. Dagher, Leila & Hasanov, Fakhri J., 2023. "Oil market shocks and financial instability in Asian countries," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 182-195.
    13. Kruse, Robinson & Wegener, Christoph, 2020. "Time-varying persistence in real oil prices and its determinant," Energy Economics, Elsevier, vol. 85(C).
    14. Barrales-Ruiz, Jose & Mohammed, Mikidadu, 2021. "Financial regimes and oil prices," Resources Policy, Elsevier, vol. 74(C).
    15. Haykir, Ozkan & Yagli, Ibrahim & Aktekin Gok, Emine Dilara & Budak, Hilal, 2022. "Oil price explosivity and stock return: Do sector and firm size matter?," Resources Policy, Elsevier, vol. 78(C).
    16. Sofronis Clerides & Styliani-Iris Krokida & Neophytos Lambertides & Dimitris Tsouknidis, 2020. "What matters for consumer sentiment? World oil price or retail gasoline price?," Working Paper series 20-22, Rimini Centre for Economic Analysis.
    17. Alsalman, Zeina & Herrera, Ana María & Rangaraju, Sandeep Kumar, 2023. "Oil news shocks and the U.S. stock market," Energy Economics, Elsevier, vol. 126(C).
    18. Salah A. Nusair & Jamal A. Al-Khasawneh, 2023. "Changes in oil price and economic policy uncertainty and the G7 stock returns: evidence from asymmetric quantile regression analysis," Economic Change and Restructuring, Springer, vol. 56(3), pages 1849-1893, June.
    19. Huang, Jionghao & Li, Ziruo & Xia, Xiaohua, 2021. "Network diffusion of international oil volatility risk in China's stock market: Quantile interconnectedness modelling and shock decomposition analysis," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1-39.
    20. Maghyereh, Aktham & Abdoh, Hussein, 2021. "The impact of extreme structural oil-price shocks on clean energy and oil stocks," Energy, Elsevier, vol. 225(C).

    More about this item

    Keywords

    Oil price shocks; Inflation; FPAS;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sbp:wpaper:110. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Faisal Saleem (email available below). General contact details of provider: https://edirc.repec.org/data/sbpgvpk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.