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Oil Price Shock and its Impact on the Macroeconomic Variables of Pakistan: A Structural Vector Autoregressive Approach

Kashif Zaheer Malik, Haram Ajmal and Muhammad Umer Zahid
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Kashif Zaheer Malik: Department of Economics, Lahore University of Management Sciences, Lahore, Pakistan,
Haram Ajmal: Punjab Resource Management Program, Government of the Punjab, Lahore, Pakistan
Muhammad Umer Zahid: Department of Economics, Lahore University of Management, Lahore, Pakistan.

International Journal of Energy Economics and Policy, 2017, vol. 7, issue 5, 83-92

Abstract: This study examines the dynamic effects of the oil price shocks on the key macroeconomic variables of Pakistan. A Structural Vector Autoregressive model is used on yearly data from 1960 to 2014. The impulse response functions indicate that the oil price shocks depress the real gross domestic product while the real exchange rate also experiences depreciation. However, the long-term interest rate and the inflation rate rise as a result of a positive oil price shock. The unanticipated changes in these macroeconomic variables threaten the economic stability of Pakistan; specifically, higher inflation and interest rates hamper the economy’s growth rate. Lastly, the variance decomposition analysis illustrates that the oil price shocks have the most impact on the inflation rate of Pakistan.

Keywords: SVAR; Oil Price Shocks; Macroeconomic Variable (search for similar items in EconPapers)
JEL-codes: C22 E40 E31 E50 Q43 (search for similar items in EconPapers)
Date: 2017
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