Time-Frequency Relationship between U.S. Output with Commodity and Asset Prices

Commodity and asset prices have a well-documented effect on economic growth, manifested through various channels. At the same time, the business cycle influences the commodity and asset prices. Whereas empirical evidence on the effect of commodity and asset prices on the long-run economic growth is ambiguous, most of the previous researches highlight a positive correlation in the short-run. The aim of this paper is to disentangle the short- and long-run co-movements between U.S. historical business cycles and commodity and asset prices, over the period 1859-2013. For this purpose we use a time-frequency approach and we test the historical influence of oil, gold, housing and stock prices, over the output growth. Different from other studies, we control for the effect of other prices and monetary conditions, using the wavelet partial coherency. In line with the previous works, we discover that co-movements between economic growth and commodity and assets prices manifest especially in the short-run. We also find that stock returns and housing prices have a more powerful effect on the U.S. economic growth rate than the oil and gold prices. The long-run co-movements are documented especially around the World War II. Finally, when controlling for the influence of the interest rate, inflation and other commodity and asset prices, co-movements become weaker in the short-run. In general the oil and housing prices lead the GDP growth, the U.S. output lead the gold prices, while there is no clear causality direction between business cycle and stock prices.