Money supply and inflation in Algeria : a Wavelet Based Analysis

Abstract

The purpose of this study is to examine the relationship between money supply and inflation in Algeria using wavelet analysis. In this study, we have applied Maxima Overlap Discrete Wavelet Transform (MODWT), Multiresolution Analysis (MRA), wavelet correlation, Wavelet Coherence, and wavelet-based Granger causality test to analyze the relationship between the two variables during the period from January 2010 to November 2019. Our findings show strong links between money supply and inflation in both the short and long run, which supports both the traditional and modern quantity theories of money. Additionally, the time scale Granger causality analysis indicates the existence of causality from money supply to inflation over different time horizons. The outcomes of the current study should be of interest to Algerian monetary policymakers as they decide to sustain growth using unconventional monetary policy.