The Distributional Impact of Price Inflation in Pakistan: A Case Study of a New Price Focused Microsimulation Framework, PRICES

Author:

Cathal ODonoghue, Beenish Amjad, Jules Linden, Nora Lustig, Denisa Sologon, Yang Wang

Keyword:

Economics, General Economics, General Economics (econ.GN)

journal:

date:

2023-09-29 16:00:00

Abstract

This paper developed a microsimulation model to simulate the distributional impact of price changes using Household Budget Survey data, Income Survey data and an Input-Output Model. We use the model to assess the distributional and welfare impact of recent price changes in Pakistan. Particular attention is paid to price changes in energy goods and food. We firstly assessed the distributional pattern of expenditures, with domestic energy fuels concentrated at the bottom of the distribution and motor fuels at the top. The budget share of electricity and motor fuels is particularly high, while domestic fuels is relatively low. While the distributional pattern of domestic fuel and electricity consumption is similar to other countries, there is a particularly high budget elasticity for motor fuels. The analysis shows that despite large increases in energy prices, the importance of energy prices for the welfare losses due to inflation is limited. The overall distributional impact of recent price changes is mildly progressive, but household welfare is impacted significantly irrespective of households position along the income distribution. The biggest driver of the welfare loss at the bottom was food price inflation, while other goods and services were the biggest driver at the top of the distribution. To compensate households for increased living costs, transfers would need to be on average 40 percent of disposable income. Behavioural responses to price changes have a negligible impact on the overall welfare cost to households.

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