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Causality between consumer price and producer price: Evidence from Mexico

  • Tiwari, Aviral Kumar
  • Suresh K.G.,
  • Arouri, Mohamed
  • Teulon, Frédéric

We examine the relationship between two inflation indices, consumer price index (CPI) and producer price index (PPI) for Mexico, a case study country which has successfully implemented inflation targeting after the economic crisis and high inflationary situation in 1995. Since the causality running from PPI to CPI exemplifies the cost push nature of inflation and the opposite is the indicator of demand pull inflation, this analysis could provide significant policy implications. We contribute to the literature by decomposing the time–frequency relationship between CPI and PPI through continuous wavelet approach. Our results indicate a bidirectional relationship between CPI and PPI. In short periods (1 to 7months scale) CPI is leading PPI, while for longer periods (8 to 32months scale) PPI is the leading variable.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 36 (2014)
Issue (Month): C ()
Pages: 432-440

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Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:432-440
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Shahbaz, Muhammad & Tiwari, Aviral Kumar & Tahir, Mohammad Iqbal, 2012. "Does CPI Granger-cause WPI? New extensions from frequency domain approach in Pakistan," Economic Modelling, Elsevier, vol. 29(5), pages 1592-1597.
  2. Aviral Kumar Tiwari, 2012. "Causality between wholesale price and consumer price indices in India: An empirical investigation in the frequency domain," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(2), pages 151-172, December.
  3. repec:bil:bilpap:0603 is not listed on IDEAS
  4. Guglielmo Maria Caporale & Margarita Katsimi & Nikitas Pittis, 2002. "Causality Links between Consumer and Producer Prices: Some Empirical Evidence," Southern Economic Journal, Southern Economic Association, vol. 68(3), pages 703-711, January.
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  6. José Julián Sidaoui & Carlos Capistrán & Daniel Chiquiar & Manuel Ramos Francia, 2009. "A Note on the Predictive Content of PPI over CPI Inflation: The Case of Mexico," Working Papers 2009-14, Banco de México.
  7. Gang Fan & Liping He & Jiani Hu, 2009. "CPI vs. PPI: Which drives which?," Frontiers of Economics in China, Springer, vol. 4(3), pages 317-334, September.
  8. Luís Aguiar-Conraria & Maria Soares, 2011. "Oil and the macroeconomy: using wavelets to analyze old issues," Empirical Economics, Springer, vol. 40(3), pages 645-655, May.
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  10. Colclough, William G. & Lange, Mark D., 1982. "Empirical evidence of causality from consumer to wholesale prices," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 379-384, August.
  11. Manuel Ramos Francia & Alberto Torres García, 2005. "Reducing Inflation Through Inflation Targeting: The Mexican Experience," Working Papers 2005-01, Banco de México.
  12. Aguiar-Conraria, Luís & Azevedo, Nuno & Soares, Maria Joana, 2008. "Using wavelets to decompose the time–frequency effects of monetary policy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(12), pages 2863-2878.
  13. Jones, J D, 1986. "Consumer Prices, Wholesale Prices, and Causality (More Empirical Evidence for the U.S., 1947-1983.)," Empirical Economics, Springer, vol. 11(1), pages 41-55.
  14. Hakan Berument & Seyit MŸmin Cilasun & Yilmaz Akdi, 2006. "The Relationship Between Different Price Indices : Evidence from Turkey," Working Papers 0603, Department of Economics, Bilkent University.
  15. Tiwari, Aviral Kumar & Mutascu, Mihai & Andries, Alin Marius, 2013. "Decomposing time-frequency relationship between producer price and consumer price indices in Romania through wavelet analysis," Economic Modelling, Elsevier, vol. 31(C), pages 151-159.
  16. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  17. Tiwari, Aviral Kumar, 2012. "An empirical investigation of causality between producers' price and consumers' price indices in Australia in frequency domain," Economic Modelling, Elsevier, vol. 29(5), pages 1571-1578.
  18. Muhammad Shahbaz & Abu N. M. Wahid & Adnan Haider, 2010. "Empirical Psychology Between Wholesale Price And Consumer Price Indices: The Case Of Pakistan," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(03), pages 537-551.
  19. Todd E. Clark, 1995. "Do producer prices lead consumer prices?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 25-39.
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