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Article

Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach

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Department of Economics, University of the Punjab, Quaid-i-Azam Campus, Lahore 54590, Pakistan
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Department of Economics and Business Administration, University of Education, Lahore 54590, Pakistan
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UBD Scholl of Business and Economics, University of Brunei Darussalam (UBD), Bandar Seri Begawan BE-1410, Brunei
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Bredin College of Business and Health Care, Edmonton, AB T5J 0K1, Canada
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Faculty of Economics and Business Administration, University of Craiova, 200585 Craiova, Romania
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Faculty of Education Science, Law and Public Administration, C-Tin Brancusi University of Targu Jiu, 210135 Târgu Jiu, Romania
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Author to whom correspondence should be addressed.
Academic Editors: Kentaka Aruga and Shigeyuki Hamori
J. Risk Financial Manag. 2021, 14(6), 277; https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14060277
Received: 25 April 2021 / Revised: 11 June 2021 / Accepted: 12 June 2021 / Published: 18 June 2021
(This article belongs to the Special Issue The Impact of COVID-19 on Economy, Energy, and Environment)
This research is the earliest attempt to understand the impact of inflation and the interest rate on output growth in the context of Pakistan using the wavelet transformation approach. For this study, we used monthly data on inflation, the interest rate, and industrial production from January 1991 to May 2020. The COVID-19 pandemic has affected economies around the world, especially in view of the measures taken by governmental authorities regarding enforced lockdowns and social distancing. Traditional studies empirically explored the relationship between these important macroeconomic variables only for the short run and long run. Firstly, we employed the autoregressive distributed lag (ARDL) cointegration test and two causality tests (Granger causality and Toda–Yamamoto) to check the cointegration properties and causal relationship among these variables, respectively. After confirming the long-run causality from the ARDL bound test, we decomposed the time series of growth, inflation, and the interest rate into different time scales using wavelet analysis which allows us to study the relationship among variables for the very short run, medium run, long run, and very long run. The continuous wavelet transform (CWT), the cross-wavelet transform (XWT), cross-wavelet coherence (WTC), and multi-scale Granger causality tests were used to investigate the co-movement and nature of the causality between inflation and growth and the interest rate and growth. The results of the wavelet and multi-scale Granger causality tests show that the causal relationship between these variables is not the same across all time horizons; rather, it is unidirectional in the short-run and medium-run but bi-directional in the long-run. Therefore, this study suggests that the central bank should try to maintain inflation and the interest rate at a low level in the short run and medium run instead of putting too much pressure on these variables in the long-run. View Full-Text
Keywords: COVID-19 pandemic; continuous wavelet transform; cross-wavelet transform; economic growth; cross-wavelet coherence; growth–inflation dynamics; maximum overlap discrete wavelet transform COVID-19 pandemic; continuous wavelet transform; cross-wavelet transform; economic growth; cross-wavelet coherence; growth–inflation dynamics; maximum overlap discrete wavelet transform
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MDPI and ACS Style

Hayat, M.A.; Ghulam, H.; Batool, M.; Naeem, M.Z.; Ejaz, A.; Spulbar, C.; Birau, R. Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach. J. Risk Financial Manag. 2021, 14, 277. https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14060277

AMA Style

Hayat MA, Ghulam H, Batool M, Naeem MZ, Ejaz A, Spulbar C, Birau R. Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach. Journal of Risk and Financial Management. 2021; 14(6):277. https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14060277

Chicago/Turabian Style

Hayat, Muhammad A., Huma Ghulam, Maryam Batool, Muhammad Z. Naeem, Abdullah Ejaz, Cristi Spulbar, and Ramona Birau. 2021. "Investigating the Causal Linkages among Inflation, Interest Rate, and Economic Growth in Pakistan under the Influence of COVID-19 Pandemic: A Wavelet Transformation Approach" Journal of Risk and Financial Management 14, no. 6: 277. https://0-doi-org.brum.beds.ac.uk/10.3390/jrfm14060277

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