Analysis of the Relationship between the Business Cycle and Inflation Gap in Time-Frequency Domain

Saleh Taheri Bazkhaneh (), Mohammad Ali Ehsani (), Mohammad Taqi Gilak Hakimabadi () and Asodollah Farzinvash ()
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Saleh Taheri Bazkhaneh : University of Mazandaran
Mohammad Ali Ehsani : University of Mazandaran
Mohammad Taqi Gilak Hakimabadi : University of Mazandaran
Asodollah Farzinvash : University of Tehran

Journal of Money and Economy, 2018, vol. 13, issue 3, 401-422

Abstract: Controlling the business cycle and minimizing the inflation gap are considered as two major goals for monetary policy. Hence, the policymaker will be able to make more decisive decisions with an awareness of the dynamic relationship and causal relationship between these two variables. Accordingly, the present study uses a discrete and continuous wavelet transform to provide a new understanding of the relationship between these two variables in Iran's economy during the years 1990:2 – 2017:1. According to the results of the research, in the short-run (less than one year), the causal relationship has been bidirectional and procyclical. In the medium run (1 to 4 years), the causal relationship is countercyclical and from the inflation gap to the business cycle. In the long run (4 to 8 years), the business cycle is leading, and the two variables are in phase. Besides, the relationship between variables is highly unstable over time and depends on different scales. Therefore, inflation in Iran's economy is not merely a monetary phenomenon, and in the medium-term is affected by changes in the real sector. According to the results of the research, for the output and the inflation to be stable, it is recommended that the policymaker take both goals simultaneously.

Keywords: Business Cycle; Inflation Gap; Wavelet Transform; Monetary Policy (search for similar items in EconPapers)
JEL-codes: C22 E31 E32 (search for similar items in EconPapers)
Date: 2018
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