How macroeconomic factors drive the linkages between inflation and oil markets in global economies? A multiscale analysis

Abstract

This paper examines the nonlinear relationships between oil and inflation for twelve major global economies in the presence of important macroeconomic variables. Using the nonparametric quantile causality approach, we show strong evidence of causality-in-variance from inflation to changes in oil prices for all economies across different quantiles with the exception of Australia. On the other hand, evidence of a causality-in-mean from oil to inflation is identified for Australia, Canada, Greece, the UK, and the US and a causality-in-variance in the same direction for almost all economies, exhibiting a hump-shaped pattern across the quantiles. Results for partial and multivariate wavelet approaches show that the macroeconomic factors drive and accentuate the oil-inflation co-movements under all frequencies and over time. These results have significant implications for investors and policy makers.