Oil Price Pass Through To Inflation in Pakistan: Evidence from Transfer Functions Approach
Author: Um-e-Safia

The study aims to find the pass-through of world oil price and domestic oil price to the inflation through transfer function model. Monthly data has been used for the period of 1974 M7 to 2014 M6. Transformation of the series has been checked with Box-Cox transformation (1964) and it suggests log transformation for all the series. Unit root of the series was checked with Beaulieu and Miron(1993) monthly unit root test. At level there was unit root at zero frequency in all three series. So, after first differencing all the series were stationary. Logged and first differenced series were used to identify and estimate the transfer function models. The results of bivariate transfer function models concluded that 8% and 11% of shock of tenth and fifteenth lag of world oil price passed to inflation respectively. 34% and 40% of the shock of first and thirteenth lag of domestic oil price passed to inflation. And 8%, 8% and 5% 0f the shock in current, third and seventh lag of world oil price passed to domestic oil prices respectively. The results of bivariate model concluded that 6%, 11% and 5% of the shock in tenth fifteenth and sixteenth lag of world oil price passes to inflation and 35% and 41% of the shock in first and thirteenth lag of domestic oil price passes to inflation.World oil prices takes almost a year to pass on its affect to inflation. As world oil prices transmits through different channels to domestic economy, so it takes almost a year to affect inflation. Domestic oil price transmits its change to inflation after a month and its effect remains in inflation for almost a year. Khan & Ahmed, (2011) obtained almost similar results. Supervisor:- Dr. Abdul Qayyum

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Supervisor: Abdul Qayyum

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