Investigating the Role of Energy Prices in Enhancing Inflation in Pakistan: Fresh Insight from Asymmetric ARDL Model

Abstract

Inflation is a serious problem of poor countries in this modern world because the majority of people live below the poverty line. It becomes difficult for poor people to fulfill their basic needs with higher inflation rate. The main objective of this study to analyze the impact of energy prices on the inflation rate in Pakistan. For analysis purpose the study uses time series data for the period 1990-2020. Consumer Price Index (CPI) is used as the dependent variable while independent variables include pump diesel domestic prices, pump gasoline domestic prices, GDP per capita, real effective exchange rate, government expenditure and imports of goods and services. The study uses non-linear Autoregressive Distributed Lag model (NARDL) econometric technique for estimation purpose. The results show that pump diesel and gasoline prices have U-shaped Kuznets curve, while economic growth, real exchange rate and government expenditures have emerged as important contributors of inflation in Pakistan. This study suggests that government should take effective measures to decrease dependence on imported energy resources and should rely on renewable energy resources to tackle the rising deficit in balance of payments (BOP).