The Application of Continuous Wavelet Transform in Discovering the Dynamics of the Causal Relationship between Liquidity and its Components with Inflation: a Case Study of Iran

This paper provides a fresh new insight into the relationship between Liquidity and its Components with inflation in Iran applying Continuous Wavelet Transform and Frequency-Time Domain Analysis. According to the (1) in the long-run, there is a stable, strong and in-phase relationship between money growth and inflation so that an increase in the money growth with a lag about 2.5 years leads to an increase in inflation. (2) In the short-run and two-month scale, the increase (decrease) in quasi-money growth is accompanied by a decrease (increase) in inflation. However, in the medium-run and long-run, inflation leads to quasi-monetary growth pointing out the fact that these variables are anti-phase in the medium-run and in-phase in the long-run. The relationship between liquidity growth and inflation in the short-run and medium-run is heterogeneous and depends on the relationship between liquidity components and inflation. In the long-run, liquidity growth follows the inflation and it will be affected after 2 years.