Changing Oil Prices, Exchange Rates and its Impact on Inflation in Pakistan

Abstract

Purpose: The key objective of the analysis is to explore the impact of oil prices and exchange rates on the inflation rate in Pakistan by using annual time-series data from the period 1980 to 2020.
 Design/Methodology/Approach: The augmented Dickey-Fuller test, bound test approach, and ARDL model are applied to achieve the objectives of the study.
 Findings: It is found that the crude oil prices and real effective exchange rate are found to be significant factors that influence the inflation rate in Pakistan. The other findings explored that money supply, exports, and gross fixed capital formation are positively related to the inflation rate.
 Implications/Originality: The author’s recommended that policymakers should take steps to control the inflation rate by regulating the fiscal and monetary policy measures in the right direction.

Exploring Macroeconomic Determinants of Inflation in Pakistan; Fresh Insights from Vector Autoregressive Analysis

“…Initially its impact is very little but after 6 periods, it tends to be increasing. This finding is also an accordance with the findings of Tolasa et al (2022), Hussain et al (2022), Ellahi (2017), and Nisar and Tufail (2013). As claimed by Lim and Papi (1997), the excessive money supply is the primary source of inflation (also see, Ujkani & Gara, 2023).…”

“…However, supply side factors that usually caused inflation includes high imports, huge external debts and government revenues (see also, (Iqbal et al, 2022;Ahmed et al, 2014a;Arif & Ali, 2012;Abdus & Zafar, 2005). The crude oil prices and the faster devaluation of the local currency also determine inflation and there is a negative correlation found between them (GENÇ et al, 2023;Hussain et al, 2022;Saleem et al, 2022). Moreover, the recent flood in the country that washed away a larger portion of crops, faster depreciation of local currency and rising of imports compared to the exports are also considered some of the important factor in creating inflation in Pakistan.…”

Connectedness between Pakistan’s Stock Markets with Global Factors: An Application of Quantile VAR Network Model

“…Ref. [17] found that exchange rate fluctuations and changes in oil prices are vital factors influencing Pakistan's inflation rate. After the pandemic and increased tension between Russia and Ukraine, more supply-side issues are arising related to oil prices that can directly or indirectly influence the prices of different sectors in oil-importing countries [18].…”