Analyzing Time-Frequency Relationship between Oil Price and Exchange Rate in Pakistan through Wavelets

This study analyzes the time-frequency relationship between oil price and exchange rate for Pakistan by using measures of continuous wavelet such as wavelet power, cross-wavelet power, and cross-wavelet coherency. The results of cross-wavelet analysis indicate that covariance between oil price and exchange rate are unable to give clear-cut results but both variables have been in phase and out phase (i.e. they are anti-cyclical and cyclical in nature) in some or other durations. However, results of squared wavelet coherence disclose that both variables are out of phase and real exchange rate was leading during the entire period studied, corresponding to the 10~15 months scale. These results are the unique contribution of the present study, which would have not been drawn if one would have utilized any other time series or frequency domain based approach. This finding provides evidence of anti-cyclical relationship between oil price and real effective exchange rate. However; in most of the period studied, real exchange rate was leading and passing anti-cycle effects on oil price shocks which is the major contribution of the study.