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

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.