Revisiting the inflation–output gap relationship for France using a wavelet transform approach

Abstract

The purpose of the paper is to revisit the inflation–output gap relationship using a new approach known as the wavelet transform. This approach combines the classical time series analysis with frequency domain analysis and presents the advantages of assessing the co-movement of the two series in the context of both time and frequencies. Using discrete and continuous wavelet methodologies for the study of the inflation–output gap nexus in the case of France, we determine that the output gap is able to predict the inflation dynamics in the short- and medium-runs, and these results have important implications to the Phillips curve theory. More precisely, we discovered that in a discrete wavelet framework, the short- and medium-term fluctuations of both variables are more closely correlated, whereas the continuous wavelet analysis states that the output gap leads inflation in short- and medium-runs.