STUDYING THE RELATIONSHIP BETWEEN THE PRICE OF GOLD AND THE INFLATION RATE PERSISTENCE IN ALGERIA USING THE FRACTIONAL INTEGRATION MODEL

Abstract

This study aims to analyse the relationship between gold price and inflation rates in Algeria to determine the extent of inflation persistence in face to gold price shocks from January1992 to March 2023 using the recently developed Fractional Cointegration Model, which allows residuals to be fractionally integrated rather than stationary, with the classical cointegration approach based on I(0) stationarity or I(1) cointegrating relationships. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in Algeria and studying the impact of some prices shocks on it, such as gold price shocks, These shocks were affected by several factors, the most important of which is the Ukrainian war, which contributed to the rise of gold price to record levels. Our results also showed that Algeria has a co-integration relationship between gold price and the inflation rate, with an estimated persistence of 0.593, which is greater than 0.5 and less than 1. This indicates that the impact of gold price shocks is still present for a long time on the inflation rate persistence in Algeria, in other words the inflation rate in Algeria will persistence for a longer period due to the shock of gold price before eventually fading away, and with the adoption of a monetary policy targeting inflation in Algeria, it will contribute to reducing the inflation rates persistence.