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.

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