Page 53 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.81, # 1, 2024, pp. 51-64

Differing results possibly stem from the fact that the coverage period of the studies is
different. The similar result showing the bidirectional causality between producer and
consumer prices in the U.S. is also reached by Jones (1985).

Caporale et al. (2002) show that the association between producer and consumer
prices are not straightforward in G7 countries, as causality runs from PPI to CPI in
France and Germany, bidirectional causality from between two variables exists in
Italy, Japan, the UK and the U.S, and there is no association between the two series.
Using monthly data for Malaysia over the period from January 1986 to April 2007,
Ghazali et al. (2008) find that the PPI leads CPI. Fan et al. (2009) uses Chinese data
for the period from January 2001 to August 2008. They report that CPI Granger causes
the producer prices in China. The authors emphasize that the evidence shows the
superior role of demand-side factors in price formation for the studied period.

Akçay (2011) investigates the direction of causality between CPI and PPI in selected
five European countries - Finland, France, Germany, Netherlands, and Sweden. Using
monthly data from January 1995 to December 2007 and applying Toda-Yamamoto
causality test, he finds that causality runs from producer prices to consumer prices in
the case of Finland and France, there are bidirectional causality in Germany. The
paper also finds that no causality exists between two variables in case of Netherlands
and Sweden.

The relationship between CPI and PPI has also been analyzed in South American
countries. Cerquera Losada et al. (2018), employing Toda-Yamamoto no-causality
test, building a vector autoregressive model or an error correction model depending
on integration and using annual data depending on availability, test relationship
between consumer prices and producer prices in Brazil, Colombia, Ecuador, Peru,
Paraguay and Uruguay. The study concludes that there is no relationship between PPI
and CPI in Brazil, Colombia, Ecuador and Uruguay, while there is a bidirectional
causality between the variables in Peru and a unidirectional causality running from
CPI to PPI in Paraguay.

Although the relationship between PPI and CPI has been studied for a long time and
with different approaches (causality tests, single equation, and multi-equation models
etc.), wavelet approach is relatively new. The research done by Tiwari et al. (2013) is
probably the first study that used wavelet approach between producer prices and
consumer prices (Islam and Kulkayeva, 2022). To analyse the relationship between
consumer prices and producer prices in Romania, they use monthly data covering the

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