Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach

This paper aims to study the role of gold as a hedge against inflation based on local monthly gold prices in China, India, Japan, France, the United Kingdom and the United States of America in periods ranging from 1955 to 2015. We extend the literature by using a novel approach with the nonlinear autoregressive distributed lags (NARDL) model (Shin et al., 2014). The main advantage of this model relies on its ability to simultaneously capture the short- and long-run asymmetries through positive and negative partial sum decompositions of changes in the independent variable(s). Moreover, we rely on local gold prices instead of those from London converted into local currencies like in most of previous studies. The results show that gold is not a hedge against inflation in the long run in all cases. In the short run, gold is an inflation hedge only in the UK, USA, and India. Furthermore, there is no long-run equilibrium between gold prices and the CPI in China, India and France. This difference may be due to traditional aspects of gold and custom controls for gold trade in these countries. Our robustness check suggests that the data time-frequency does not change the specification of the NARDL model but can change conclusions regarding the role of gold as a hedge against inflation in certain countries.     

Time consistent monetary policy with endogenous price rigidity

I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria—one with low inflation, the other with high inflation. In contrast, when price rigidity is endogenous, the high inflation equilibrium ceases to exist. Hence, time consistent equilibrium is unique. This result depends on two features of the analysis: (1) a plausible quantitative specification of the fixed cost of price change, and (2) the presence of an arbitrarily small cost of inflation that is independent of price rigidity.     

Does inflation cause gold market price changes? evidence on the G7 countries from the tests of nonparametric quantile causality in mean and variance

This article utilizes the newly proposed nonparametric causality-in-quantiles test to examine the predictability of mean and variance of changes in gold prices based on inflation for G7 countries. The causality-in-quantiles approach permits us to test for not only causality in mean but also causality in variance. We start our investigation by utilizing tests for nonlinearity. These tests identify nonlinearity, showing that the linear Granger causality tests are subject to misspecification error. Unlike tests of misspecified linear models, our nonparametric causality-in-quantiles tests find causality in mean and variance from inflation to gold market price changes between the 0.20 quantile and the 0.70 quantile, implying that very low- and high-price changes in gold markets are not related to inflation. These changes should be related to other sources, such as financial shocks and exchange market shocks. We find support that gold serves as a hedge against inflation, but only in the mid-quantile ranges, i.e. quantiles from 0.20 to 0.70. Our results show that gold does not serve as a hedge against inflation during periods when gold market price changes are very low or very high, which are respectively quiet and highly volatile periods.     

Economic policy uncertainty and demand for money in Australia

The demand for money has received a great deal of attention in the empirical literature. This literature, however, has emphasized factors such as interest rate, income, inflation rate and exchange rate as the primary determinants of money demand. Although an emerging strand of literature examines uncertainty as a potential determinant of money demand, findings have been mixed. Using a news-based Economic Policy Uncertainty (EPU) index and Australian quarterly data from 1998 to 2017, we study the impact of policy uncertainty on demand for money. Autoregressive distributed lag (ARDL) results show that the economic policy uncertainty measure has a negative short-run effect on the demand for money, suggesting the wider public hedge against future expected inflation, and positive long-run effect, whereby the broader public hold more cash to stay liquid during times of economic uncertainty. Also, introducing nonlinearity into the money demand equation, we find an asymmetric effect, more in favour of currency appreciations, supporting the expectations effect of further appreciations in exchange rate movements.     

Monetary base and federal government debt in the long-run: A non-linear analysis

Government bonds are usually traded between the financial institutions and the Fed during the open market operations. These operations impact the bank reserves, subsequently influencing the monetary base. The monetary base and government bonds may portray a common trend and government debt could potentially bind the central bank to debt monetization. This paper, using monthly data on federal government debt and the monetary base from 1947:1 to 2018:10, investigates the presence of a long-run equilibrium relationship between the two variables and as to how the long-run equilibrium relationship vary in the short-run. Threshold cointegration tests find evidence of a long-run equilibrium relationship. Estimates of the threshold vector error-correction model find statistically significant evidence of contraction in the monetary base growth in the short-run in regime 1. In regime 2, the growth in the monetary base does not adjust to accommodate faster government debt growth. These estimates find no evidence of debt monetization or otherwise in either of the regimes in the United States. The Fed, by reducing the monetary base, perhaps focuses more on the inflation target. The findings also suggest a potential scenario where the Fed and the fiscal authority are not conjoined with each other in their operations.     

Aggregate price responses to wage and productivity changes: Evidence from the U.S.

This papei examines the dynamic responses of prices to wage and productivity changes and distinguishes between short-run and long-run effects. The long-run solution of the dynamic specification is consistent with the hypothesis of markup pricing over unit labour costs. The restrictions implied by this long-run behaviour are not rejected.by U.S. data. In addition, the evidence supports the view that the short-run wage effects are significantly stronger than productivity effects.     

A long-run,short-run,and politico-economic analysis of the welfare costs of inflation

The long-run, short-run, and politico-economic welfare implications of inflation are assessed in a Bewley model of money demand. All agents produce and consume every period, and hold money to self-insure against idiosyncratic risk. The model is calibrated so the equilibrium monetary distribution shares features with US data. The long-run welfare costs of inflation are shown to be large because inflation reduces the ability of money to mitigate risk. However, the beneficial redistributive effect of inflation is magnified along the short-run transition and reduces the overall costs. These short-run benefits result in a majority-rule inflation rate above the Friedman Rule.     

Currency Options and Export-Flexible Firms

This paper examines the production and hedging decisions of a globally competitive firm under exchange rate uncertainty. The firm is risk averse and possesses export flexibility in that it can distribute its output to either the domestic market or a foreign market after observing the realized spot exchange rate. To hedge against its exchange rate risk exposure, the firm can trade fairly priced currency call options of an arbitrary strike price. We show that both the separation and the full‐hedging results hold if the strike price of the currency call options is set equal to the ratio of the domestic and foreign selling prices. Otherwise, neither result holds. Specifically, we show that the optimal level of output is always less than that of an otherwise identical firm that is risk neutral. Furthermore, an under‐hedge (over‐hedge) is optimal whenever the strike price of the currency call options is below (above) the ratio of the domestic and foreign selling prices.     

The relative adjustment of wages and prices: direct tests within a multiple-equation system

In order to assess the relative rigidity of the aggregate price level and the nominal wage rate most researchers have focused on the implied behaviour of the real wage rate in response to a purely demand disturbance. The present work examines the explicit behaviour of the two variables and is therefore able to analyse the variables' short-run responses within the context of their defined long-run behaviour. While the paper reports evidence of long-run stability in the real wage rate, additional evidence is presented which supports both sticky-price and sticky-wage models. The determining factor is the choice of lag.     

Can gold hedge and preserve value when the US dollar depreciates?

This paper examines gold's hedging and value-preserving properties against fluctuations in the US dollar. We propose a likelihood ratio test that draws a distinction between hedging and safe-haven characteristics on the basis of the conditional dependence structure under different market conditions. Our evidence, based on an analysis of data for US dollar exchange rates with a broad set of currencies, indicates that gold can serve as a hedge against US dollar depreciation but is a weak safe haven against extreme US dollar movements. These results have implications for risk management and hedging strategies.     

The long-run Phillips curve and non-stationary inflation

Modern theories of inflation incorporate a vertical long-run Phillips curve and are usually estimated using techniques that ignore the non-stationary behaviour of inflation. Consequently, the estimates obtained are imprecise and unable to test the veracity of a vertical long-run Phillips curve. We estimate a Phillips curve model taking into account the non-stationary properties in inflation and identify a small but significant positive relationship between inflation and unemployment. The results also provide some evidence that the trade-off between inflation and the rate of unemployment in the short-run worsens as the mean rate of inflation increases.     

Precious metals–exchange rate volatility transmissions and hedging strategies

This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (i.e., gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. Furthermore, these results become more pervasive when the exchange rate and federal funds rate are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions.     

Short-run and long-run dynamic linkages among international stock markets

This paper investigates the dynamic linkages among the U.S., Japan, U.K. and German stock market indices using daily data for the April 1, 1984 to May 31,91 period. In contrast to previous studies, a vector error correction model of cointegrated variables as developed by Johansen (1988, 1991) and Johansen and Juselius (1990) is employed to examine both short-run and long-run intermarket relationships among these four stock markets. Significant evidence is found in support of both short-run and long-run relationships among these four stock market indices. The U.S. stock market leads other stock markets in short-run in the pre and post October 1987 crash, but leads all other markets in the long-run in all periods examined. The presence of a one long-run cointegrating equilibrium relationship among the four stock market indices implies a limited role of international diversification for investors with long holding periods. However, because the US-Japan-Germany stock market indices, and Japan-UK-Germany indices are not cointegrated with each other, these indices may yield international portfolio diversification in the long-run. Finally, the conflicting results from multivariate cointegration tests found in this study can not be used to provide conclusive evidence on international stock market efficiency.     

The link between inflation and inflation uncertainty: Evidence from G7 countries

In this paper we adopt the Markov-switching heteroscedasticity model to analyse the inflation series for G7 countries and examine the interaction between inflation rate and its uncertainty over both the short- and long-run. It is found that the relationship between inflation and inflation uncertainty depends on whether the shock is permanent or transitory. The relationship also differs from country to country. High uncertainty about long-run inflation is associated with a significant positive shift in inflation for Canada, Germany, and Japan. High uncertainty about short-run inflation is associated with a significant positive shift in inflation for Germany and USA, and a significant negative shift in inflation for Canada. The modelling approach employed in this paper is empirically supported by various diagnostics including the Vuong test. We also derive the two components of the variance of inflation forecast for a particular forecast horizon. It is found that the inflation uncertainty increases at all horizons in the middle of 1970s and return to the low level in the middle of 1980s.First version received: June 2001/Final version received: October 2003We would like to thank three anonymous referees for many helpful comments and suggestions.     

High inflation and returns on residential real estate: evidence from Turkey

This study examines the hedging behaviour of real estate investment in a high inflationary environment. The hypothesis that the real estate investment hedges both expected and unexpected inflation is tested. The returns of investment on residential apartments in several neighbourhoods in the capital of Turkey are used in the analysis. Expected inflation is measured by three proxies. It is found that in a high inflationary environment, real estate investment does not provide hedge against inflation. A reverse causality between returns on real estate and changes in expected inflation is not observed. However, a relationship between real returns and changes in inflationary expectations seem to be different in relatively low and relatively high income neighbourhoods.     

Econometric analysis of bank lending and business cycles in South Africa

This article examines econometric relationships between bank lending and business cycle in South Africa. Two long-run economic relationships are hypothesized between total credit and the variables, namely, coincidental indicators, spread between lending and borrowing rates, money supply, stock price index, inflation and banking sector specific factors included in the model. Of these variables, only coincident indicators, changes in money supply as well as capital, and reserve are found to exert some influence on short-run total credit availability.     

On dynamic stability in monetary models which incorporate short- and long-run expectations of inflation in the demand for the money function

The demand for money function should depend on the long-run rate of inflation. A model of macroeconomic fluctuations based on short-run unanticipated inflation is used, together with adaptive expectations to develop conditions for price stability. It is shown that Cagan's conditions are neither necessary nor efficient.     

An investigation into the dynamic relationship between international and China’s crude oil prices

This article studies the dynamic relationship between international (WTI, Brent and Dubai) and domestic (Da Qing) crude oil prices in China using threshold cointegration method. We find evidence of a long-run equilibrium relationship between each pair of international and Da Qing oil prices, favouring the market integration hypothesis. We also estimate asymmetric adjustments under the momentum threshold autoregressive (M-TAR) specification in a TVECM, and the results show that adjustments to eliminate disequilibrium happen faster when oil price spread increases than when it decreases. The long-run and short-run Granger causality tests support the notion that China has influence on the international oil markets. The results imply that China should open up its domestic and imported oil markets, and also establish a well-functioning crude oil futures market, as they are essential for arbitrage and hedging strategies.     

黄金价格、中国黄金储备与通货膨胀关系研究

文章通过格兰杰因果检验了黄金价格、人民币实际有效汇率、国内货币供应量与通货膨胀的关系。研究认为,黄金是对抗通货膨胀的有效工具,黄金价格上涨、黄金储备增大、国际石油价格和大宗商品价格上浮对通货膨胀有持续的拉动效应;货币供应量与通货膨胀之间存在短期与长期效应不一致的现象。提出密切关注黄金价格、增加国家黄金储备、建立黄金价格预警机制等措施。     

Price uncertainty,future markets and correlation

This paper examines the optimal trade and hedging decisions of a competitive exporting firm which faces concurrently hedgeable exchange rate risk and non‐hedgeable inflation risk. The macroeconomic interaction between exchange rate and domestic inflation rate risk is described by a state variable. The (strong) correlation is pivotal in determining the optimal risk management. It is shown how optimal hedging strategies are affected by state‐dependent preferences of the firm. The optimal hedge policy is to minimize the variation of marginal utility of final wealth across states of nature instead of minimizing the variance of final wealth.