Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis

Muhammad Khan and Ayaz Ahmed
Additional contact information
Ayaz Ahmed: Pakistan Institute of Development Economics, Islamabad

The Pakistan Development Review, 2011, vol. 50, issue 4, 491-511

Abstract: This study examines the transmission channels through which the global food and oil price shocks affects selected macroeconomic variables including inflation rate, output, money balances, interest rate and real effective exchange rate for Pakistan using monthly data over the period 1990M1-2011M7. An empirical analysis is carried out by employing structural vector autoregressive (SVAR) framework. Generalised Impulse Response Functions and Generalised Forecast Variance Decompositions are employed to track the impact of oil and food price shocks to Pakistan‘s economy. Results suggest that oil price shock affects industrial production, appreciates real effective exchange rate negatively and affect inflation and interest rate positively. Whereas, following food price shocks, industrial output increases. Similarly, interest rate and inflation rate responds positively following food price shocks. However, the variation in interest rate due to food price shock is relatively larger than that of oil price shocks. Generalised impulse response functions reveal that real effective exchange rate is most important source of disturbances following either oil price or food price shocks. Generalised forecast variance decompositions analysis also supports the findings based on generalised impulse response functions. The result clearly reveals that oil and food price shocks significantly affect output, short-term interest rate, inflation rate and real effective exchange rate. However, among all, real effective exchange rate has seen a dominant source of variations in Pakistan. This implies that supply-side and demand-side disturbances originated by external shocks are the major sources of inflation (stagflation) in Pakistan.

Keywords: Oil and Food Price Shocks; SVAR; GIRFs; GFEVDs; Pakistan (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
http://www.pide.org.pk/pdf/PDR/2011/Volume4/491-511.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pid:journl:v:50:y:2011:i:4:p:491-511

Access Statistics for this article

More articles in The Pakistan Development Review from Pakistan Institute of Development Economics Contact information at EDIRC.
Bibliographic data for series maintained by Khurram Iqbal ().