Open AccessOil Price Shocks, Systematic Monetary Policy and Economic Activity
Author(s) -
Muhammad Zeshan,
Wasim Shahid Malik,
Muhammad Nasir
Publication year - 2019
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v58i1pp.65-81
Subject(s) - economics , monetary policy , oil price , vector autoregression , monetary economics , structural vector autoregression , price level , price shock , macroeconomics
This study quantifies the impact of oil price shocks and thesubsequent monetary policy response on output for Pakistan. It employs aquarterly Structural Vector Auto-regression framework for the period1993–2015. It first discovers that Hamilton’s (1996) Net Oil PriceIncrease indicator appropriately reveals most of the oil price shockshitting Pakistan’s economy. We find that a contractionary monetarypolicy, resulting from the oil price shocks, contributes to significantoutput loss in Pakistan. After encountering the Lucas critique, thepresent study finds that around 42 percent of the output loss is due tothe ensuing tight monetary policy. This suggests that the central bankof Pakistan can reduce the impact of oil price shocks by reducing itsintervention in the market. JEL Classification: E1, E3, E5 Keywords: OilPrice Shocks, Monetary Policy, Structural Vector Autoregression