Citation: Khurshid, N.; Emmanuel Egbe, C.; Fiaz, A.; Sheraz, A. Globalization and Economic Stability: An Insight from the Rocket and Feather Hypothesis in Pakistan. Sustainability 2023, 15, 1611. https://doi.org/10.3390/su15021611 Academic Editor: Danail Hristozov Received: 20 November 2022 Revised: 28 December 2022 Accepted: 29 December 2022 Published: 13 January 2023 Copyright: © 2023 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). sustainability Article Globalization and Economic Stability: An Insight from the Rocket and Feather Hypothesis in Pakistan Nabila Khurshid 1, * , Chinyere Emmanuel Egbe 2, *, Asma Fiaz 3 and Amna Sheraz 1 1 Department of Economics, Comsats University, Islamabad 44800, Pakistan 2 Department of Economics and Finance, Medgar Evers College, City University of New York, Brooklyn, NY 11225, USA 3 School of Economics, Quaid-e-Azam University, Islamabad 44800, Pakistan * Correspondence: nabilakhurshid@comsats.edu.pk (N.K.); egbe@mec.cuny.edu (C.E.E.) Abstract: The purpose of this study was to analyze the irregular pattern of changing inflation as a result of the pass-through of the exchange rate and fluctuations in oil prices in the current globalization scenario. We used annual data sets for crude oil prices, real effective exchange rates, and inflation in Pakistan from 1972 to 2021 for the analysis. The control variables used in the current study were imports (IMP), gross domestic product per capita (GDP), exports (EXP), globalization (GLOB), and interest rates (CRATE). Our findings from a non-linear autoregressive distributed lag (NARDL) analysis showed that inflation had an asymmetric rocket and feather pattern regardless of how globalization was defined or measured. On the other hand, GDP, EXP, and GLOB negatively impacted inflation, and CRATE and IMP had positive effects on inflation. Our study suggested that alternative policies, such as fixing the exchange rate, might decrease uncertainty and stabilize the Pakistani economy in the future. Moreover, increasing the use of sustainable energy would reduce the dependence of the economy on oil prices, which would lower its impact on the economy. Keywords: real effective exchange rate; oil prices; inflation; non-linear autoregressive distributed lag; rocket and feather hypothesis; globalization; Pakistan 1. Introduction Inflation primarily refers to persistent increases in the prices of goods and services. A rise in the prices of commodities leads to a decrease in the purchasing power of the people in society. The decline in the purchasing power of individuals in the economy eventually leads to a reduction in the level of savings and investments in the economy [1]. Oil is an imported good and the exchange rate affects the price of oil immensely. Therefore, understanding the relationship between the exchange rate and the price of oil and its pass-through on inflation is critical for developing economic policies [2]. Fluctuations in exchange rates play a crucial role in shaping the economic link or as a transmission mechanism between domestic and international markets, directly affecting the prices of goods and services in the domestic economy [2]. Exchange rate movements can influence actual inflation and future price movements. Macroeconomists simultaneously linked oil price shocks to diminished economic activity and higher inflation [3]. As Lescaroux and Mignon [4] observed, several transmission networks exist through which oil prices can influence economic activity and inflation. For instance, a surge in the price of crude oil affects the prices of petroleum products, eventually affecting consumers and producers. This is because crude oil prices directly affect the prices of energy-related items, such as household fuels, electricity, and motor fuels. From the production side, a rise in the price of crude oil increases production costs, which lowers the overall output, employment, real wages, investments, and profits. The government does not fix the exchange rate at a specific level but lets the supply and demand for the currency determine the exchange rate [4]. The participation of the Sustainability 2023, 15, 1611. https://doi.org/10.3390/su15021611 https://www.mdpi.com/journal/sustainability