Analyzing Time–Frequency Based Co-movement in Inflation: Evidence from G-7 Countries

Abstract

The co-movement in the international inflation rates, among others, may be produced by common shocks, similarities in central bank reaction functions, international trade and the operation of purchasing power parity theory. However, to assess the synchronization of inflation fluctuations across countries or regions is critical from the perspective of understanding inflation behavior and formulation of correct monetary policy. This study attempts to investigate inflation rates co-movement among G7 countries at different frequencies or time scales under the framework of the continuous wavelets. In particular, this study analyzes the coherency and the phase relationship in time---frequency space in inflation rates of G7 countries. The wavelet-based measure of cohesion allows us to assess simultaneously how synchronization has evolved over time and across frequencies. Overall, our results indicate that inflation co-movements in G7 countries are multi-scale and characterized by structural breaks.