Analyzing Transmission Mechanism of Commodity Price on Inflation and Reserves in Pakistan

Abstract

This research examines the effects that changes in commodity prices have had on the reserves and inflation of Pakistan, emphasizing the impact of such price changes on economic stability. The goal of this paper is to show how gold, oil, and dollar prices affect inflation and reserves. This paper also estimates the effects of the variations in dollar, oil, and gold rates on the reserves and inflation of Pakistan. In this respect, the inflation and reserves are the dependent factors, while the prices of oil, gold, and dollars are the dependent variables. The time series data based on ARDL has been used to estimate the effect of independent factors on the dependent variables for 30 years in the present study. This high correlation between crude oil price and inflation shows that an increase in crude oil prices leads to aggravating the prevalent inflationary pressures in Pakistan. The results, on the other hand, suggest that the changes in the price of gold and the dollar have no effect on the reserves or inflation. These findings also draw on the imperative for close monitoring of the change in crude oil price by policymakers and the implementation of policies that reduce its impacts on inflation. The study further adds to the literature pool by carrying out an in-depth analysis of the relationship between key commodity prices and macroeconomic indicators of Pakistan, focusing on resilience against external shocks and economic diversification. Future policy actions that would aim to improve economic stability and attain sustainable growth in Pakistan can be informed by knowledge culled from this study.