Second-Round Effects of Energy Inflation in Manufacturing Sector: An Evidence for Pakistan

Abstract

Manufacturing is considered to be the backbone of social and economic development worldwide. The issue of energy inflation has become a major macroeconomic concern for many sectors, including manufacturing. This study examines Pakistan's manufacturing sector specifically to determine how second-round energy inflation affects its operations. Further, the study aims to determine the impact of macroeconomic indicators on manufacturing value-added (MVA) including inflation reverts. In this study, manufacturing value-added is used as a dependent indicator, while energy inflation (EI), core inflation (CI), political instability (PI), real interest rate (RIR), and financial development (FD) are independent indicators for the period 1991 to 2020. This study uses the gap model for capturing the variation or second round in inflation and the autoregressive distributive lagged model for individual long-run_ and short-run impacts on manufacturing value-added growth. Based on the gap model, results show the huge presence of second-round effects of energy inflation in Pakistan. ARDL results show that energy inflation, core inflation, financial development, and political instability all affect manufacturing value-added significantly excluding real interest rates. This research also helps the Pak government to promote energy efficiency and adoption of energy-saving technologies in the manufacturing sector. Companies can reduce their dependency on fuel and mitigate the impact of energy price fluctuations. This study helps to stabilize manufacturing costs and improve competitiveness, ultimately contributing to the growth of manufacturing value-added in Pakistan.