The Impact of Economic Policy Uncertainty on Food Prices: A Case Study of Pakistan

Abstract

This study investigates the impact of economic policy uncertainty (EPU) on food prices (FP) in case of Pakistan by using monthly time series data from Jan 2011 to Dec 2023. The study utilized unit root tests such as, Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests to check the stationarity of the variables. To investigate the asymmetric relationship between EPU and FP, the study utilizes the Nonlinear Autoregressive Distributed Lag (NARDL) model along with the Bounds testing approach to determine the presence of long-run cointegration. The short-run results from the NARDL estimation indicate that an increase in EPU has a negative effect, leading to a decline in food prices. Conversely, the long-run findings reveal that EPU has a positive and significant impact on food prices. Additionally, the finding of Bound test confirmed the long-term Cointegration between EPU and food prices. This implies that to executing strategies that stabilize the macroeconomic environment and enhance market confidence can alleviate the inflationary effects of policy uncertainty on food prices. Further, improving supply chain resilience and establishing early-warning systems can help manage short-term price fluctuations caused by economic uncertainty.