EXPLORING COINTEGRATION BETWEEN GOLD PRICES AND INFLATION: AN EMPIRICAL ANALYSIS OF G-8 ECONOMIES
Keywords:
ARDL, Cointegration, Gold, InflationAbstract
The primary objective of this research is to explore whether there exists any meaningful relationship between domestic gold prices and expected rates of inflation, with a particular focus on the potential predictive capability of gold prices for such inflationary trends. The intricate relationship between gold prices and expected inflation is empirically investigated by considering the time-series data from Canada, France, Germany, Japan, Italy, Russia, the UK, and the US for the period 1990-2022. The primary data diagnostic tests revealed that the considered variables are non-stationary at the same level, prompting the application of an autoregressive distributed lag model, which identified a compelling and statistically significant linkage between domestic gold prices and anticipated inflation rates. The findings of the study can be attributed to the distinct ways in which inflation expectations materialize within these economies, potentially leading to a quicker convergence of mean-reverting inflation rates. The study concludes that gold prices can explain the anticipated inflation trends, thereby enhancing our understanding of the intricate interplay between these economic variables.
References
A. Posen, S. V., Laubach, T., & Mishkin, F. S. (1998). Inflation Targeting: Lessons from the International Experience. Princeton University Press.
Abtié, A. P., & Roache, S. K. (2009). Inflation Hedging for Long-Term Investors. International Monetary Fund, Finance Department.
Ali, A. (2015). The impact of macroeconomic instability on social progress: an empirical analysis of Pakistan. (Doctoral dissertation, National College of Business Administration & Economics Lahore).
Ali, A. (2018). Issue of Income Inequality Under the Perceptive of Macroeconomic Instability: An Empirical Analysis of Pakistan. Pakistan Economic and Social Review, 56(1), 121-155.
Ali, A. and Bibi, C. (2017). Determinants of Social Progress and its Scenarios under the role of Macroeconomic Instability: Empirics from Pakistan. Pakistan Economic and Social Review 55 (2), 505-540.
Ali, A., & Audi, M. (2016). The Impact of Income Inequality, Environmental Degradation and Globalization on Life Expectancy in Pakistan: An Empirical Analysis. International Journal of Economics and Empirical Research, 4 (4), 182-193.
Ali, A., & Audi, M. (2018). Macroeconomic Environment and Taxes Revenues in Pakistan: An Application of ARDL Approach. Bulletin of Business and Economics (BBE), 7(1), 30-39.
Ali, A., & Rehman, H. U. (2015). Macroeconomic instability and its impact on the gross domestic product: an empirical analysis of Pakistan. Pakistan Economic and Social Review, 285-316.
Audi, M., & Ali, A. (2023). Public Policy and Economic Misery Nexus: A Comparative Analysis of Developed and Developing World. International Journal of Economics and Financial Issues, 13(3), 56.
Baur, D. G., & Lucey, B. M. (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review, 45(2), 217-229.
Bernanke, B. S., & Gertler, M. (2000). Monetary policy and asset price volatility. Federal Reserve Bank of Kansas City, 17-52.
Blose, L. E. (2010). Gold prices, cost of carry, and expected inflation. Journal of Economics and Business, 62(1), 35-47.
De Gregorio, J. (2012). Commodity prices, monetary policy, and inflation. IMF Economic Review, 60(4), 600-633.
Diba, B. T., & Grossman, H. I. (1988). The theory of rational bubbles in stock prices. The Economic Journal, 98(392), 746-754.
Dooley, M., Frankel, J., & Mathieson, D. J. (1987). International capital mobility: What do saving-investment correlations tell us? IMF Staff Papers, 34(3), 503-530.
Enders, W., & Siklos, P. L. (2001). Cointegration and threshold adjustment. Journal of Business & Economic Statistics, 19(2), 166-176.
Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: Representation, estimation, and testing. Econometrica, 55(2), 251-276.
Feldstein, M. (1983). Inflation, income taxes, and the rate of interest: A theoretical analysis. In Inflation, tax rules, and capital formation (pp. 28-43). University of Chicago Press.
Fernando, N. (2017). The Role of Gold in an Investment Portfolio: An empirical study on diversification benefits of gold from the perspective of Swedish investors. Doctoral Thesis submitted to Umeå School of Business and Economics, Sweden.
Fisher, I. (1930). The Theory of Interest. New York, 43, 1-19.
Goodhart, C., & Hofmann, B. (2001). Asset prices, financial conditions, and the transmission of monetary policy. In conference on asset prices, exchange rates, and Monetary Policy, Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
Goodhart, C., & Hofmann, B. (2001, March). Asset prices, financial conditions, and the transmission of monetary policy. In conference on asset prices, exchange rates, and Monetary Policy, Stanford University (pp. 2-3).
Marx, K. (1867). Capital: A Critique of Political Economy (Vol. 1). Moscow: Progress Publishers.
Mishkin, F. S. (1990). What does the term structure tell us about future inflation? The Journal of Monetary Economics, 25(1), 77-95.
Pindyck, R. S. (1993). The present value model of rational commodity pricing. The Economic Journal, 103(418), 511-530.
Stock, J. H., & Watson, M. W. (2003). Forecasting output and inflation: The role of asset prices. The Journal of Economic Literature, 41(3), 788-829.
Taylor, N. J. (1998). Precious metals and inflation. Applied Financial Economics, 8(2), 201-210.
Xu, Y., Su, C. W., & Ortiz, J. (2021). Is gold a useful hedge against inflation across multiple time horizons? Empirical Economics, 60, 1175-1189.
