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Wavelet multiresolution analysis of the liquidity effect and monetary neutrality
Jönköping University, Jönköping International Business School, JIBS, Economics. Department of Applied Statistics, College of Business and Economics, University of Rwanda, Kigali, Rwanda.ORCID iD: 0000-0001-6611-4762
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper employs wavelets to examine the relationship between money, interest and output on a scale-by-scale basis using data for the US and Sweden during 1985-2017. First, series are decomposed into orthogonal timescale components using the discrete wavelet transform (DWT) together with the Daubechies least asymmetric wavelet filter, and then causality analysis (in the Granger sense) is performed at each scale of variations. The dynamics at the finest scale of one-year movements indicate that interest rate and real output respond to movements in the quantity of money. At horizons of four years and above, there is a feedback mechanism. This pattern is very similar in both countries at the mentioned scales and suggests that monetary disturbances have significant real effects and these effects last longer than is assumed in pure real-business cycle models. Further, a locally weighted regression analysis suggests that not only are the direction and strength of the relationship among these variables scale-dependent but also the shape of the relationship may change from one scale to another. This method suggests a negative relationship between money and the short-term interest rate, as predicted by the liquidity preference theory, at cycles of one to four-year periods. Overall, these findings highlight the relevance of timescale decomposition in macroeconomic analysis.

National Category
Economics Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:hj:diva-39450OAI: oai:DiVA.org:hj-39450DiVA, id: diva2:1206318
Note

An earlier version of this article was published in Computational Economics.

Available from: 2018-05-16 Created: 2018-05-16 Last updated: 2018-05-16
In thesis
1. Asymmetry and multiscale dynamics in macroeconomic time series analysis
Open this publication in new window or tab >>Asymmetry and multiscale dynamics in macroeconomic time series analysis
2018 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis consists of three independent articles preceded by an introductory chapter. The first two articles focus on exchange rate dynamics in emerging market and developing economies, taking into account nonlinearities and asymmetries which are relevant for these countries and are potentially due to (i) transaction costs and other market frictions, and (ii) official intervention in the foreign exchange market. The third article is devoted to the analysis of the effects of monetary policy at different time horizons.

The first article evaluates the purchasing power parity (PPP) theory in a panel of Sub-Saharan African countries. Unit root tests that are based on exponential smooth transition autoregressive (ESTAR) models are applied to account for nonlinearities and asymmetries in real exchange rate adjustment towards its equilibrium (mean) value. The results indicate empirical support for the PPP theory.

The second article examines the relationship between current account adjustment and exchange rate flexibility in a panel of emerging market and developing economies. The purpose of this article is to (i) obtain a measure of exchange rate flexibility that considers autoregressive conditional heteroscedasticity and possible asymmetric responses of the exchange rate to shocks, and (ii) apply suitable dynamic panel data estimators to investigate this relationship. The results indicate that more flexible exchange rates are associated with faster current account adjustment.

By means of wavelets the third article investigates the liquidity effect and the long-run neutrality of money at detailed timescales using time series data for Sweden and the US. The results indicate a significant liquidity effect at horizons of one to four years, but there is no evidence of monetary neutrality.

Place, publisher, year, edition, pages
Jönköping: Jönköping University, Jönköping International Business School, 2018. p. 29
Series
JIBS Dissertation Series, ISSN 1403-0470 ; 122
National Category
Economics Probability Theory and Statistics
Identifiers
urn:nbn:se:hj:diva-39452 (URN)978-91-86345-84-6 (ISBN)
Public defence
2018-06-13, B1014, Jönköping International Business School, Jönköping, 10:00 (English)
Opponent
Supervisors
Available from: 2018-05-16 Created: 2018-05-16 Last updated: 2018-05-16Bibliographically approved

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