An Introduction to Wavelets for Economists

Wavelets are mathematical expansions that transform data from the time domain into different layers of frequency levels. Compared to standard Fourier analysis, they have the advantage of being localized both in time and in the frequency domain, and enable the researcher to observe and analyze data at different scales. While their theoretical foundations were completed by the late 1980s, the 1990s saw a rapid spread to a wide range of applied sciences. A number of successful applications indicate that wavelets are on the verge of entering mainstream econometrics. This paper gives an informal and non-technical introduction to wavelets, and describes their potential for the economic researcher.