The gold price – Inflation relation in the case of Vietnam: empirical investigation in the presence of structural breaks

Abstract

Purpose This paper investigates the relationship between domestic gold prices and inflation in Vietnam based on the monthly series of the gold price index and consumer price index over the period of December 2001–July 2020. Design/methodology/approach The co-integration between the domestic gold price and inflation is examined within the autoregressive distributed lag-error correction (ARDL bounds testing) framework. This paper also applies the vector error correction model (VECM) and impulse response function analysis to explore the causal relationship between these two variables. Moreover, since both gold and inflation series are likely to have structural changes over time, a unit root test controlling for significant breaks is employed in this paper. Findings Findings from the ARDL bounds testing model suggest the presence of a co-integration between the underlying variables. The VECM indicates that shocks in inflation lead to a negative response to gold prices in the long run. In the short term, only fluctuations in gold prices impact inflation, and this causality is unidirectional. Research limitations/implications Gold is regarded as a critical financial asset to preserve wealth from inflation pressure in the case of Vietnam. These findings propose implications for both investors and policymakers. Originality/value Empirical results suggest that inflation has a long-term impact on gold prices in the Vietnamese market. In the existence of a permanent inflationary shock, domestic prices of gold respond negatively to this shock; hence, gold can act as a good hedge against inflation in Vietnam.