Monetary Policy Response to Rising Oil Prices
Team Members: Dr. Vaqar Ahmed, Muhammad Zeeshan
Pakistan is a net oil importer and faces frequent international oil price shocks. These shocks bring macroeconomic uncertainty resulting in output loss and inflation. Hence, these oil price shocks are a serious concern for monetary authorities in setting the interest rate. The Stat Bank of Pakistan (SBP) faces a dual problem in such a situation. A tight monetary policy stance though limits inflation but results in output losses. On the other hand, an easy monetary policy stance reduces the output loss but brings more inflation. The present study quantifies the optimal interest rate which, if implemented by the SBP after the oil price shocks, will maintain minimum uncertainty with least variation in prices and output.