Examining Pakistan's Lead-Lag Relationship between Money Growth and Inflation: Novel Opinions from Wavelet Analysis

Abstract

The study inspects the correlation between Pakistan's money supply and inflation from 1991 to 2022, utilizing different wavelet analysis techniques such as cross-wavelet transformations, wavelet power spectrum, and phase-difference analysis. The primary conclusions of the study validate the quantity theory of money, revealing a notable correlation between inflation and money supply over both medium and long-term periods when analyzed within the time-frequency domain. However, despite confirming the conventional quantity theory of money regarding their long-term correlation, the Ordinary Least Squares (OLS) analysis does not uphold the Quantity Theory of Money (QTM) in the context of Pakistan. Through phase difference analysis, the study confirms a bidirectional link between money supply and inflation, consistent with classic and contemporary quantity theories of money which acknowledge this relationship across various time frames.