The relationship between output and asset prices: A time – and frequency – varying approach

This paper employs wavelet analysis to examine the relationship between the U.S. output and asset prices. We use the theory of the monetary transmission mechanism to explain the relationship between them. Wavelet analysis takes the simultaneous examination of co-movement and causality into account in both the time and frequency domains. We do find the positive correlation between each two series in the time domain. More specifically, the output and asset prices including oil, stock and house prices exhibit positive co-movement in the most of the sample period. However, the relationship between output and gold prices is a positive correlation for only a few years. From the frequency domain, output and stock, house prices correlate with each other across different frequencies. In addition, output and oil prices correlate at middle (medium run) and higher (short run) frequencies and output and gold prices correlate at higher (short run) frequencies. These findings offer important implications analysing how to apply assets prices to forecast output and analysing periodic variation of economic growth and economical sustainability for policymakers and practitioners.