Abstract
This study presents a multivariable threshold analysis of global oil price movements for Pakistan’s economy. Instead of imposing exogenous thresholds for global oil prices, we apply threshold vector autoregressive approach to identify the thresholds endogenously. On the basis of statistical significance, we identify two thresholds of global oil prices, which define immensely declining, declining and increasing oil prices regimes. The study confirms the existence of asymmetries and nonlinearity among oil price shocks and real effective exchange rate, real interest rate, inflation and output of manufacturing sector. These variables respond differently in terms of magnitude, direction and adjustment period in various regimes. Real effective exchange rate depreciates in response to increase in global oil prices in all the regimes. Real interest rates witnesses decline in the first and third regimes but increases in the second regime. This may be due to intensity of the reaction of the monetary authorities to anchor the inflation expectations. In the second and third regimes, economic activity plummets in response to the increase in global oil prices but witnesses expansion in the first regime, which may be due to the negative real interest rates. Pass through to inflation of global oil prices is positive in the first and third regimes whereas the inflation declines in the second regimes, which may be due to aggressive monetary stance.