Master of Science in Economics

Faculty / School

Faculty of Business Administration (FBA)


Department of Economics

Date of Submission



Dr. Qazi Masood Ahmed, Institute of Business Administration, Karachi

Project Type

MSECO Research Project

Access Type

Restricted Access


A significant amount of research is done, after the oil shocks occur in the 1970s, to investigate the impact on a number of economic variables. But most of the studies differentiated the regimes of oil price shocks on the basis of increase and decrease in oil prices and examined the asymmetry. Huang et al. (2005) estimated the endogenous thresholds level for oil prices. He followed Tsay (1998) approach and statistically identified different thresholds of oil price changes for U.S. and Canada and Japan. The studies in Pakistan also identified the relationship among oil price shocks, inflation, economic activity, exchange rates and terms of trade and some of them investigated the asymmetric relationship but those studies also followed the oil price increase/decrease rather than threshold analysis. This study focused on the multivariable threshold analysis for Pakistan by choosing “oil price change” as the threshold variable by following Huang et al. (2005). The study confirms the existence of nonlinearity among oil price shocks and major macroeconomic variables REER, real discount rate, inflation, LSM and in Pakistan and the statistical test identifies two threshold levels for oil price changes. In case of an oil price shock under regime 1, MoM inflation responds positively and instantaneously; REER also witnesses a contemporaneous depreciation which adjusted in the next month; the discount rate in real terms tends to decline because; i) increase in inflation due to direct impact and indirect impact of inflation expectations. ii) the frequency of monetary policy announcements varied overtime ; ii) whenever a policy stance changes, it is done in a gradual manner. In rising oil price regime (regime 3), MoM inflation responds positively but with a lag; the depreciation in REER takes more time to adjust; while due to the lagged rise in inflation under this regime the rise in discount rate is offset in real terms. As far as the behavior of industrial production is concerned, the response of LSM to the oil price shock is negative, during both the decreasing oil prices regime (regime 1) and rising oil price regime (regime 3), with a lag and supports the finding of Khan and Ahmed (2011). While the oil price shock under regime 2 (slight changes in oil prices) does not have any significant impact on any of the four macroeconomic variables used in this study.


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