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

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  • Olaolu Richard Olayeni
  • Aviral Kumar Tiwari
  • Reza Sherafatian-Jahromi
  • Olagbaju Ifeolu Oladiran

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.

Suggested Citation

  • Olaolu Richard Olayeni & Aviral Kumar Tiwari & Reza Sherafatian-Jahromi & Olagbaju Ifeolu Oladiran, 2014. "Inflation, output gap, and money in Malaysia: evidence from wavelet coherence," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 4(3/4), pages 320-338.
    • Handle: RePEc:ids:ijcome:v:4:y:2014:i:3/4:p:320-338
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    References listed on IDEAS

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    1. Browne, Frank & Cronin, David, 2010. "Commodity prices, money and inflation," Journal of Economics and Business, Elsevier, vol. 62(4), pages 331-345, July.
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    4. Oomes, Nienke & Ohnsorge, Franziska, 2005. "Money demand and inflation in dollarized economies: The case of Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 462-483, September.
    5. Diebold, Francis X. & Yilmaz, Kamil, 2012. "Better to give than to receive: Predictive directional measurement of volatility spillovers," International Journal of Forecasting, Elsevier, vol. 28(1), pages 57-66.
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