Analysis of the Causal Relationship between Precious Metal Prices and Inflation: Evidence from Ethiopia
Purpose: Keeping inflation stability is the main challenge in Ethiopia. One of the reasons for this could be fluctuation in commodity price specifically, precious metal price. Therefore, this study aims to analyze the causal relationship between precious metal prices and inflation in Ethiopia. Design/Methodology/Approach: The monthly time series data from January 2000 up to April 2021 was used. The Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests of unit root were employed to examine whether the series became stationary or not at level. The Johanson co-integration test was implemented to determine the co-integration of the variables. After stationarity and integration tests were performed, the Vector Autoregressive model (VAR) was employed to estimate the model. After model estimation, VAR Granger causality was tested to check the causal relationship between the variables. Findings: ADF and PP test indicate that variables under study are stationary after the first difference. The trace statistic and the maximum eigen-value test of co-integration showed that there is no co-integrating vector at 0.05 level of significance. VAR estimation result shows that one and two-period lag of gold price, one and two-period lag of silver price, one and two-period lag of platinum price, and one-period and two-period lag of CPI had a statistically significant effect on inflation (CPI) in the short-run. The granger causality analysis results indicated that there was a statistically significant causality between CPI and platinum prices. Practical Implications: These results may be used to guide policymakers in terms of where emphasis should be given regarding inflation instability in Ethiopia. Originality/Value: The results of this study revealed that inflation and precious metal price have short-run causal relationship and no prior result that could be aligned or contrary to this result in Ethiopia.