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Exchange rate pass-through to macroeconomic indicators using Vector Auto Regression: Empirical evidence from Pakistan

Author

Listed:
  • Farhan AHMED

    (Shaheed Zulfikar Ali Bhutto Institute of Science & Technology (SZABIST), Pakistan)

  • Muhammad OWAIS

    (Sui Southern Gas Company Ltd., Pakistan)

  • Sandhya KUMARI

    (MCB Arif Habib Ltd., Pakistan)

  • Rohit RAJJANI

    (Torrens University Brisbane, Australia)

Abstract

This study aims to examine the exchange rate pass-through to oil prices, import prices, money supply, consumer prices and interest rate in the context of Pakistani economy. By using, monthly data from July 2005 to December 2015, unrestricted VAR model is employed as suggested by McCarthy (2000). This study looks at the degree and existence of causality or shock between variables/series. The major shock was seen in money supply by one unit point in exchange rate and less impact of impulse response was seen in discount rate, consumer prices and oil prices. It was also found that causality exists between exchange rate and money supply and discount rate. Furthermore variance decomposition results indicate that nominal exchange rate was explained mainly by money supply shocks which were contributing to 15.10% at a lag period of 12. For the Consumer price index variance decomposition was around 7.19%, for discount rate and oil prices it was 3.4% and 3% respectively at the optimal lags selected for 12 periods. This study helps policymakers to take steps according to the extent of shocks caused in different times.

Suggested Citation

  • Farhan AHMED & Muhammad OWAIS & Sandhya KUMARI & Rohit RAJJANI, 2018. "Exchange rate pass-through to macroeconomic indicators using Vector Auto Regression: Empirical evidence from Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(616), A), pages 61-76, Autumn.
    • Handle: RePEc:agr:journl:v:3(616):y:2018:i:3(616):p:61-76
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    References listed on IDEAS

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    Cited by:

    1. Abdul Jalil, 2020. "What Do We Know of Exchange Rate Pass Through?," PIDE Knowledge Brief 2020:5, Pakistan Institute of Development Economics.
    2. Nabila Khurshid & Chinyere Emmanuel Egbe & Asma Fiaz & Amna Sheraz, 2023. "Globalization and Economic Stability: An Insight from the Rocket and Feather Hypothesis in Pakistan," Sustainability, MDPI, vol. 15(2), pages 1-19, January.

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