Asymmetric Effect of Oil Prices on Inflation in Pakistan using a NARDL Econometric Approach Volume 29, Issue 2

Abstract

This study investigates the impact of oil price fluctuations on inflation in Pakistan, focusing specifically on asymmetric effects. Employing the Nonlinear Autoregressive Distributed Lag (NARDL) model, it examines how oil price increases and decreases influence inflation differently. Using secondary annual data from the Pakistan Bureau of Statistics and the State Bank of Pakistan, the study considers the Consumer Price Index (CPI) as the dependent variable, while independent variables include domestic oil prices (LOP), exchange rate (LEXH), interest rate (LINTR), and unemployment rate (LUNEMP). Results indicate that oil prices significantly affect inflation, with past oil prices exhibiting a persistent impact. The NARDL model highlights asymmetry, showing that oil price increases (LOP_POS) exert a stronger positive effect on inflation than decreases (LOP_NEG). Exchange rate fluctuations display mixed effects, with lagged depreciation negatively influencing inflation, while interest rates and unemployment rates do not demonstrate statistically significant long-run effects. Given the asymmetric effects, monetary authorities should implement differentiated strategies for oil price increases and decreases to manage inflation effectively. Additionally, exchange rate stability plays a crucial role in mitigating inflationary pressures.