Does oil price volatility influence real sector growth? Empirical evidence from Pakistan

Abstract The study investigates the short-run and long-run relationship between oil price fluctuation and real sector growth in Pakistan. Four major sectors of the economy (Manufacturing, electricity, transport and communication, and livestock) were analyzed to find any relation. Similar studies can be found in the existing literate, however, the distinguish feature of present study is that it investigates each individual sector’s linkage to oil price changes. Annual time series data of selected sectors ranging from 1976 to 2017 is selected for the study. Classical normal linear regression models under auto regressive distributed lag (ARDL) were employed to study the relationship between economic sectors and oil price fluctuation. Empirical results indicate that changes in oil price adversely affect manufacturing, livestock and electricity sectors in short-run and long-run, while significant positive impact was found on transportation and communication. Consequently, the sectors prone to oil price changes require special attention of policy makers. An expansionary monetary policy can be a short-run solution to reduce the impact of increasing oil price, whereas the government can introduce a policy framework to counter this effect in long-run.

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