Does CPI Granger-Cause WPI? New Extensions from Frequency Domain Approach in Pakistan

Muhammad, Shahbaz and Kumar, A.T.K. and Mohammad, Iqbal Tahir (2012): Does CPI Granger-Cause WPI? New Extensions from Frequency Domain Approach in Pakistan.

Abstract

The present study significantly contributes to the economic literature by investigating the direction of causality between WPI and CPI by applying frequency domain causality approach developed by Lemmens et al. (2008) based on spectral approach. We use monthly frequency data covering the period of 1961-2010 in case of Pakistan. Our results provide evidence of cointegration between the variables. Furthermore, we find unidirectional causal relationship running from CPI to WPI that varies across frequencies i.e., CPI Granger-causes WPI at lower, medium as well as higher level of frequencies reflecting long-run, medium and short-run cycles. This implies that CPI should be a leading indicator for important policy decisions pertaining to monetary or fiscal policies in Pakistan.

• Item Type: MPRA Paper
• Language: English
• Keywords: WPI, CPI, Frequency Domain Approach
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Akcay, S., (2011), ‘The causal relationship between producer price index and consumer price index: Empirical evidence from selected European countries’, International Journal of Economics and Finance, 3, 227-232.

Akdi, Y., Berument, H. and Cilasun, S. M., (2006), ‘The relationship between different price indices: Evidence from Turkey,’ Physics A, 360, 483-492.

Caporale, G.M., Katsimi, M. and Pittis, N. (2002), ‘Causality links between consumer and producer prices: Some empirical evidences,’ Southern Economic Journal, 68, 703-711.

Cecchetti, S.G., Kohler, M., Upper, C. (2009), ‘Financial Crises and Economic Activity’, NBER Working Papers 15379, National Bureau of Economic Research, Inc.

Clark. T. (1995), ‘Do producer prices lead consumer prices? Federal Reserve Bank of Kansas City Economic Review, 80, 25-39.

Colclough, W. G and M. D. Lange, (1982), ‘Empirical evidence of causality from consumer to wholesale prices,’ Journal of Econometrics, 19, 379–384.

Cushing, M. J and M. G, McGarvey, (1990), ‘Feedback between wholesale and consumer price inflation: A reexamination of the evidence,’ Southern Economic Journal, 56, 1059-1072.

Diebold, F. X., (2001), ‘Elements of forecasting (2nd Ed.). Ohio: South-Western.

Engle, R. F, (1978), ‘Testing price equations for stability across spectral frequency bands,’ Econometrica, 46, 869–881.

Engle, R.F., and C.W.J. Granger, (1987), ‘Cointegration and error correction representation: Estimation and testing,’ Econometrica, 55, 251-276.

Ghazali, M. F., Yee, O. A., Muhammad, M. Z., (2008), ‘Do producer prices cause consumer prices? Some empirical evidence’, International Journal of Business and Management, 3, 78-82.

Granger, C. W. J., (1969), ‘Investigation of causal relations by econometric models and cross-spectral methods,’ Econometrica, 37, 424-438.

Guthrie, R. S., (1981), ‘The relationship between wholesale and consumer prices,’ Southern Economic Journal, 47, 1046-1055.

Hamilton, J. D., (1994), ‘Time series analysis’. Princeton University Press, Princeton, NJ.

Hatanaka, M and T. D. Wallace, (1979), ‘Multicollinearity and the estimation of low order moments in stable lag distributions,’ In Evaluation of Econometric Models, J Kmenta and J Ramsay (eds.), New York: Academic Press.

Lemmens, A., Croux, C. and Dekimpe, M. G. (2008), ‘Measuring and testing Granger causality over the spectrum: An application to European production expectation surveys,’ International Journal of Forecasting, 24, 414-431.

Lütkepohl, H., (2006), ‘Structural vector autoregressive analysis for cointegrated variables,’ AStA Advances in Statistical Analysis, 90, 75-88.

Narayan, P. K., (2005), ‘The savings and investment nexus for China: Evidence from co-integration tests,’ Applied Economics, 37, 1979-1990.

Pesaran, M. H., Shin, Y. and R. J. Smith, (2001), ‘Bounds testing approaches to the analysis of long run relationships’, Journal of Applied Econometrics, 16, 289-326.

Pierce, D. A., (1979), ‘R-squared measures for time series,’ Journal of the American Statistical Association, 74, 901-910.

Priestley, M. B. (1981), ‘Spectral analysis and time series’. London: London Academic Press.

Rao, N. M., Bukhari, S. K. H., (2011), ‘Asymmetric shocks and co-movement of price indices’, SBP Working paper no.38.

Samanta, G and Mitra, S., (1998), ‘Recent divergence between wholesale and consumer prices in India- a statistical exploration,’ RBI Occasional Papers, 19.

Schwert, G.W. (1989), ‘Tests for unit roots: A monte carlo investigation’, Journal of Business & Economic Statistics, 7, 147-159.

Shahbaz, M., Awan, U. R and Nasir, M. N., (2009), ‘Producer and consumer prices nexus: ARDL bounds testing approach,’ International Journal of Marketing Studies, 1, 78-86.

Shahbaz, M., Wahid, A. N. M. and Haider, A. (2010), ‘Empirical psychology between wholesale price and consumer price indices: the case of Pakistan,’ The Singapore Economic Review, 55, 537-551.

Sidaoui, J, Capistran, C., Chiquiar, D. and Ramos-Francia, M. (2009), ‘A note on the predictive content of PPI over CPI inflation: The case of Mexico,’ Working Paper 2009-14, Banco de Mexico.

Silver, J. L and T. D, Wallace, (1980), ‘The lag relationship between wholesale and consumer prices- An application of the Hatanaka-Wallace procedure,’ Journal of Econometrics, 12, 375–387.

Toda, H. Y and T. Yamamoto, (1995), ‘Statistical inference in vector autoregressions with possibly integrated processes,’ Journal of Econometrics, 66, 225–250.