Oil Price Shock and its Impact on the Macroeconomic Variables of Pakistan : A Structural Vector Autoregressive Approach

This study examines the dynamic effects of the oil price (OP) shocks on the key macroeconomic variables of Pakistan. A structural vector autoregressive model is used on yearly data from 1960 to 2014. The impulse response functions indicate that the OP shocks depress the real gross domestic product while the real exchange rate also experiences depreciation. However, the long-term interest rate and the inflation rate (INF) rise as a result of a positive OP shock. The unanticipated changes in these macroeconomic variables threaten the economic stability of Pakistan; specifically, higher inflation and interest rates hamper the economy's growth rate. Lastly, the variance decomposition analysis illustrates that the OP shocks have the most impact on the INF of Pakistan