Gold in Monetary Transmission - Some Evidence of Nonlinearities

Shubhasis Dey ()
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Shubhasis Dey: Indian Institute of Management Kozhikode

No 202, Working papers from Indian Institute of Management Kozhikode

Abstract: As a commodity, gold occupies a special place in Indian psyche. With formal capital markets still out of reach for a large section of the Indian population, gold, beyond its traditional use as jewellery, also acts as a store of value, especially under an environment of moderately high inflation. In this paper, we further explore the asset price channel of monetary transmission by endogenizing gold price inflation within the Indian macroeconomic system. Supported by empirical tests in favor of such an inclusion, a linear VAR model results indicate that gold seems to act as a shock absorber by way of shielding other macroeconomic variables, especially GDP growth, from the influence monetary policy shocks. In India, the demand for gold is primarily met by imports. Thus, the dynamics of gold, real exchange rate and inflation are likely to be interlinked in a nonlinear manner. Based on estimation of a TVAR model and simulation methods of inference, we find that there are significant differences in the macroeconomic dynamics of the Indian economy under high and low inflation regimes. Moreover, the TVAR model results suggest that gold seems to matter more in the Indian macroeconomic system during episodes of high inflation.

Keywords: Inflation regime; gold price; hedge; TVAR (search for similar items in EconPapers)
JEL-codes: C32 E31 E44 E47 E52 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-06
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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