Fractional cointegration between gold price and inflation rate: Implication for inflation rate persistence

In this study, we employ a recently developed Fractional Cointegrating Vector Autoregressive (FCVAR) model to analyze the relationship between gold price and inflation rate, to determine the responsiveness of inflation rate persistence of the selected countries to gold price shocks. Our analyses cover two decades; ranging from January 2001 to December 2019. We also account for country heterogeneity; specifically, due to variation in countries' level of development, income level, and monetary policy framework. Our results suggest that the effect of gold price shock lingers for a long time on inflation rate persistence of developing countries, and for a short time on inflation rate persistence of developed countries. We also find that a higher level of income is associated with lower gold price - inflation rate cointegrating persistence, but the possibility of high-income countries having higher gold price - inflation rate cointegrating persistence than low-income countries cannot be dispelled. We also find that adoption of inflation targeting monetary policy reduces gold price - inflation rate cointegrating persistence and that gold price - inflation rate cointegrating persistence is higher under limited or intermediate floating exchange rate arrangement than under free-floating and currency peg arrangement.