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An Analysis of the Relationship between Inflation and Gold Prices: Evidence from Pakistan

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  • Saira Tufail

    ()
    (Lecturer in Economics, Fatima Jinnah Women University, Islamabad, Pakistan.)

  • Sadia Batool

    ()
    (MPhil Student, Pakistan Institute of Development Economics, Islamabad, Pakistan.)

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    Abstract

    In this study, we formulate a new inflation equation to capture the potential effects of gold and stock prices on inflation in Pakistan. We aim to assess the inflation-hedging properties of gold compared to other assets such as real estate, stock exchange securities, and foreign currency holdings. Applying time-series econometric techniques (cointegration and vector error correction models) to data for 1960–2010, we find that gold is a potential determinant of inflation in Pakistan. On the other hand, it also provides a complete hedge against unexpected inflation. Real estate assets are more than a complete hedge against expected inflation, although stock exchange securities outperform gold and real estate as a hedge against unexpected inflation. Foreign currency proves to be an insignificant hedge against inflation. Given the dual nature of the relationship between gold and inflation, it is increasingly important for the government to monitor and regulate the gold market in Pakistan. Moreover, stock market investment should be encouraged by the government given that asset price inflation does not pose a critical problem for Pakistan as yet.

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    Bibliographic Info

    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 18 (2013)
    Issue (Month): 2 (July-Dec)
    Pages: 1-35

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    Handle: RePEc:lje:journl:v:18:y:2013:i:2:p:1-35

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    Related research

    Keywords: Gold prices; inflation hedging; assets; time series econometrics technique; Pakistan.;

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