Output Gap, Money Growth and Interest Rate in Japan: Evidence from Wavelet Analysis

Aviral Tiwari, Olaolu Olayeni, Reza Sherafatian-Jahromi and Olofin Sodik Adejonwo

Arthaniti: Journal of Economic Theory and Practice, 2019, vol. 18, issue 2, 171-184

Abstract: Abstract This article investigated the relationship between output, money and interest rate, using wavelet tools for the period 1972–2017. Application of such tools is helpful in answering particularly two questions: first, what the strength and direction of the causal relationships between money, output and interest rate is, and second, whether the relationship is cyclical or anti-cyclical in nature. Findings from this article show that output and money are highly coherent in low, middle and high frequencies, and coherence increases while controlling for interest rate, with money growth as the leading variable most of the time across frequencies. Output and interest rate are equally highly coherent, mostly at high frequency and some bits of middle frequency; coherence increases with the control for money, and interest rate often times leads the relationship. Also, money and interest rate are coherent at low, middle and high frequencies with interest rate leading the relationship, and controlling the effect of output increases the coherence at some times and decreases at other times. There are observable evidences of both cyclical and anti-cyclical relationships among the variables. Policy decisions should be cautious of shortrun moves in order not to trigger undesired long-run outcomes since no difference is observed in the direction of causation over time–frequency. JEL: C49, E43, E52

Keywords: Output gap; money growth; interest rate; wavelet analysis; causality; Japan (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:artjou:v:18:y:2019:i:2:p:171-184

DOI: 10.1177/0976747918800847

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