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

Naafey Sardar and Zulfiqar Hyder ()
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Zulfiqar Hyder: State Bank of Pakistan

No 110, SBP Working Paper Series from State Bank of Pakistan, Research Department

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.

Keywords: Oil price shocks; Inflation; FPAS (search for similar items in EconPapers)
JEL-codes: E32 Q41 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2022-11
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