Crude Oil Price, Monetary Policy and Output: The Case of Pakistan

Abstract

Rapid rises in the prices of crude oil in the decade of 2000s have raised concerns among policy-makers around the world, as the theoretical and empirical literature has established that oil price shocks may have an adverse impact on the macro economy of the country. In particular, for the oil importing developing countries like Pakistan, this upward trend in the price of oil can have serious repercussions in terms of creating inflationary pressures in the economy, increasing budget deficit and balance of payment problems, and thus affecting the GDP growth. Pakistan was on the path of rising GDP growth in the first seven years of this decade. But in the year 2007-08, the situation has changed. This oil price shock could possibly be one of the reasons. As an impact of rising growth rate of GDP, demand for energy has also gone up rapidly in this period. In the energy mix for the year 2005-06, oil accounts for 32 percent of the total energy used in Pakistan, and it is the second largest source of energy used after natural gas, which accounts for 39 percent. With oil being the second largest source of energy used along with almost constant rate of its production Pakistan is heavily dependent on oil imports from Middle East exporters (Saudi Arab playing the lead role). Almost 82 percent of the demand for petroleum products in the country is met through imports.1 Pakistan spent about 44 percent of export earnings on oil imports in 2006-07. This percentage was only 27 percent in 2004-05. Therefore, the international oil price increase has a direct impact on the macro economy of the country, especially on the oil price GDP relationship. The share of net oil imports in GDP is an indicator of the relative importance of the oil price rise to the economy in terms of the potential adjustments needed to offset it. For Pakistan over the last few years, this ratio has risen from 3.13 in 1990-91 to -5.24 in 2005-06 [Malik (2007)]. With such a high ratio, unless country is running in surplus, or has extremely large foreign exchange reserves, high oil price is dealt by severe macro economic adjustments.

Re-estimation of Keynesian Model by Considering Critical Events and Multiple Cointegrating Vectors

“…These goods contributed more than 50 percent share of total imports and among these goods Petroleum Group only constituted the largest share in our import bill that is 32 percent in 2010 (State Bank of Pakistan). An increase in oil prices disturbs balance of payment and puts downward pressure on exchange rate which makes imports more expensive [Malik (2008); Kiani (2010)].…”

Oil Price Shocks, Systematic Monetary Policy and Economic Activity

“…The first task of this study, therefore, is to identify an appropriate indicator for oil price shock for Pakistan. Oil prices have asymmetric relationship with macroeconomic variables in Pakistan [Malik (2008)], and a positive change in the oil prices brings more variation in macroeconomic indicators than do the negative one [Hamilton (1996)]. Based on this reasoning, the Hamilton's (1996) Net Oil Price Increase (NOPI) indicator appears to be most appropriate.…”

“…In this backdrop, it is very important to investigate the nature of the relationship between oil price shocks and the subsequent monetary policy. The only study in Pakistan in this perspective is that of Malik (2008), who finds that oil price shocks have a significant and asymmetric relationship with macroeconomic variables. Nevertheless, the study is limited in the sense that it does not discriminate between the anticipated and unanticipated policy responses.…”

Türkiye’de Petrol Fiyatları, İhracat ve Reel Döviz Kuru İlişkisi: ARDL Sınır Testi Yaklaşımı ve Dinamik Nedensellik Analizi

“…Ham petrol, doğal gaz ve rafine edilmiş petrol fiyatları, yurtiçi üreticilerin sattığı ürünlerin yaklaşık yüzde 95'inin fiyatlarından daha fazla dalgalanmıştır. Malik (2008)'e göre 1973-74'de görülen birinci negatif petrol şoku, OPEC'in petrol ambargosundan, ikincisi 1978-79 petrol şoku OPEC'in petrol üretimini kısmasından kaynaklanmıştır. 1991'de Irak savaşıyla başlayan ikinci önemli şok 1991-1992 dönemleri arasını kapsasa da etkisi büyük olmuştur.…”

“…Petrol fiyatlarının makroekonomik değişkenler üzerine etkisini inceleyen çok sayıda çalışmaya [(Wilson (2001) petrol fiyatları, dış ticaret dengesi, reel döviz kuru; Otto (2003) petrol fiyatları, dış ticaret haddi; Ahmed & Donoghue (2010) petrol fiyatları, ihracat, endüstriyel hammadde fiyatları, gelir adaletsizliği; Malik (2008) petrol fiyatları, üretim, reel döviz kuru, dünya faiz oranı, petrol tüketimi; Chen & Hsu (2012) petrol fiyatları, dış ticaret (ihracat ve ithalat)] rastlanmaktadır. Bu çalışmaların bazılarında petrol fiyatlarının asimetrik olduğu bazılarında ise petrol fiyatlarının doğrusal olduğu varsayımı altında model tahminleri yapılmıştır.…”