Asymmetric pass‐through between oil and transport prices: Evidence from a nonlinear analysis

Abstract

The present study focuses on a widely discussed phenomenon, Asymmetric Price Transmission, which refers to the nonlinear behavior of prices when they are evaluated at their crests and troughs. The underlying study attempts to capture this behavior, giving special emphasis to the transportation sector of Pakistan. By employing monthly data of retail oil prices spanning between 1990 and 2016, we have tried to empirically investigate the existence of this phenomenon in a sector directly linked with oil price variations. This sector has been often overlooked in terms of its evaluation within the given context. Our study employs a recently developed nonlinear autoregressive distributed lag model (NARDL), to examine the pass‐through of oil prices into the fares of the transportation sector. This model allows us to capture short‐run and long‐run estimates simultaneously and also offers an opportunity to determine the magnitude of respective positive and negative oil price shocks. In addition, this study categorizes the transport sector into subsegments of LTVs and HTVs and finds differential patterns in the response of these two categories against oil price variations. The obtained results indicate that oil prices affect the fares of the transportation sector asymmetrically. The findings of the study are instrumental for identifying the pass‐through of oil prices to the subsegments of transport sectors. This identification about the differential impact/pass upon the various segments of the transport sector can be helpful for policymakers, especially if they are concerned about devising a trickle‐down policy in periods of oil price decline.