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

Shazia Kousar, Saeed Ahmad Sabir, Farhan Ahmed and Štefan Bojnec ()
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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

Energies, 2022, vol. 15, issue 20, 1-21

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.

Keywords: climate change; urbanization; twin deficit; energy prices; Vector Auto-Regressive Model; electricity prices; oil prices (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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