This paper proposes a continuous wavelet transform causality method that dispenses with minimum-phase spectral density matrix factorization. Extant methods based on minimum-phase function are computationally intensive and those utilizing discrete wavelet transform also fail to unfold causal effects over time and frequency. The proposed method circumvents the need for minimum-phase transfer functions and is able to localize causality in time and frequency suitably. We study the ability of the proposed method using simulated data and find that it performs excellently in identifying the causal islands. We then use the method to analyze the time-frequency causal effects in the relationship between the US financial stress and economic activity and find that financial stress has been causing economic activity particularly during the unwinding financial and economic distress and not the other way around.
Purpose
This paper aims to examine the transmission from oil price to local food price returns in Nigeria from January 1995 to May 2019.
Design/methodology/approach
To circumvent erratic behaviours and account for possibilities of noises at the edge of the wavelet signals, the paper combines wavelet and Markov-switching techniques to determine the significance and magnitude of oil–food price dynamics across different time scales.
Findings
It is shown that oil to food price pass-through changed across frequencies. Notably, results reveal a swift pass-through which signals the dominance of the direct effect of oil price shocks on food prices with evidence of weak spillover in the short term. The medium- and long-term horizons witness the dominance of the indirect effect of oil price shocks with much sluggish transmission to food prices; the highest significant pass-through of about 4% are also observed when the oil price is denominated in the naira–USD exchange rate.
Originality/value
The study improves understanding of the relationship between oil price shocks and domestic food price returns. It shapes policy prescription on appropriate inflation targeting strategies of monetary authorities.
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