Asymmetric causality using frequency domain and time-frequency domain (wavelet) approaches

Abstract

Previous research that used asymmetric Granger causality tests relied upon data from the same time domain. In this paper we extend those tests theoretically to the frequency domain. We then apply these new tests to analyze causal link between nominal exchange rate and inflation in G6 and BRICS countries. For sensitivity analysis, we also apply time-frequency domain (wavelet) method in the context of asymmetric causality. Empirical results reveal that inflation causes the exchange rate in most of the countries in our sample. Our findings imply that anti-inflationary policies in these countries could stabilize the exchange rates and increase international confidence in attracting foreign investment which is important for sustained economic growth.