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Wavelet Multiresolution Analysis of the Liquidity Effect and Monetary Neutrality

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  • Olivier Habimana

    (Jönköping University
    University of Rwanda)

Abstract

This paper employs the maximum overlap discrete wavelet transform to obtain timescale decompositions of monetary aggregates, short-term interest rates and output to investigate two propositions in monetary economics: the liquidity effect and the long-run neutrality of money. Evidence from correlation and Granger causality over five timescales suggests that the liquidity effect is statistically significant in both the US and Sweden’s economies, with a shorter time horizon in the US than in Sweden. There is no evidence of monetary neutrality in both economies; at finest timescales, output Granger causes money in Sweden, whereas it is the other way around in the US. At long time horizons, there is a feedback between money and output in both economies. Key to our findings is that monetary disturbances have significant real effects and these effects last longer than it is assumed in real business cycle models.

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  • Olivier Habimana, 2019. "Wavelet Multiresolution Analysis of the Liquidity Effect and Monetary Neutrality," Computational Economics, Springer;Society for Computational Economics, vol. 53(1), pages 85-110, January.
    • Handle: RePEc:kap:compec:v:53:y:2019:i:1:d:10.1007_s10614-017-9725-1
    DOI: 10.1007/s10614-017-9725-1
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    Cited by:

    1. Kostyantyn Anatolievich Malyshenko & Majid Mohammad Shafiee & Vadim Anatolievich Malyshenko & Marina Viktorovna Anashkina, 2023. "Dynamics of the securities market in the information asymmetry context: developing a methodology for emerging securities markets," Papers 2307.04140, arXiv.org.
    2. Mihai Mutascu & Alexandre Sokic, 2023. "An extended wavelet approach of the money–output link in the United States," Empirical Economics, Springer, vol. 64(4), pages 1647-1665, April.
    3. Usman Khalid & Olivier Habimana, 2021. "Military Spending and Economic Growth in Turkey: A Wavelet Approach," Defence and Peace Economics, Taylor & Francis Journals, vol. 32(3), pages 362-376, April.
    4. Habimana, Olivier, 2018. "Asymmetry and Multiscale Dynamics in Macroeconomic Time Series Analysis," MPRA Paper 87823, University Library of Munich, Germany.

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    More about this item

    Keywords

    Granger causality; Liquidity effect; Monetary neutrality; Multiresolution analysis (MRA); Wavelets;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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