Inflation, output gap, and money in Malaysia: evidence from wavelet coherence

Olaolu Olayeni, Aviral Tiwari, Reza Sherafatian-Jahromi and Olagbaju Ifeolu Oladiran

International Journal of Computational Economics and Econometrics, 2014, vol. 4, issue 3/4, 320-338

Abstract: We investigated the relationship among inflation, output gap, and money in the time-frequency space for Malaysia over the period 1986:2-2008:12. We utilised the wavelet coherence and phase difference in continuous wavelet analysis and multiresolution in discrete wavelet analysis. We then developed a DWT-based Diebold-Yilmaz index to measure scale-specific spillover. First, we used the approaches to examine the strength, co-movement, and synchronisation among the variables. We further examined whether the relationship is cyclical or anti-cyclical. Wavelet coherence and phase difference show that money growth and output gap are coherent in low and middle frequencies. Moreover, we found output gap to be a leading variable often. We also noticed evidence of both cyclical and anti-cyclical relationships among the variables. The DWT-based Diebold-Yilmaz spillover index shows the extent of the dynamic interactions among the variables both over time and over frequency.

Keywords: inflation; output gap; money; wavelet coherence; spillover index; Malaysia; phase difference; continuous wavelet analysis; multiresolution; discrete wavelet analysis; DWT; discrete wavelet transform. (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijcome:v:4:y:2014:i:3/4:p:320-338

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