The Money-Output Relationship, Output Gap, and Core Inflation: Some Applications of Wavelet Functions

This article examines the use of wavelet functions in the empirical analysis of macroeconomic variables, focusing on three applications relevant to the Peruvian economy: the causality between money and output, the estimation of the output gap, and core inflation. Using monthly data from 1992 to 2002, the study applies wavelet theory to evaluate different time scales and their impact on the relationships under study. The results indicate that the causal relationship between money and output is not constant, varying depending on the time scale considered; specifically, money causes output at medium time scales, while output may cause money in the short run. In addition, alternative measures of the output gap and core inflation are constructed, which are consistent with the dynamics observed in the Peruvian economy. The implications suggest that wavelet-based approaches could enrich the analysis and calibration of monetary policy by providing more detailed information on the relationship between economic variables across different time horizons. (Abstract and audio: Department of Economic Publications)