Gold, inflation and exchange rate in dollarized economies – A comparative study of Turkey, Peru and the United States

Meng Sui, Erick W. Rengifo and Eduardo Court

International Review of Economics & Finance, 2021, vol. 71, issue C, 82-99

Abstract: This paper conducts a comprehensive empirical study on gold’s hedging potential against adverse movements of inflation and exchange rates for three countries: Turkey (highly dollarized), Peru (low dollarized) and United States (benchmark). With the use of quantile-on-quantile regression (QQR) and quantile-on-quantile correlation (QQCOR) models, we find that gold can offer protection against currency movements and inflation fluctuation at all times for Turkey and the United States, but fail to do so during Turkey’s hyperinflationary period; in Peru, gold is a good hedge if the change of CPI is above 3.29% or currency depreciation rate is above 3.24%. We reveal that the conclusion of gold acting as a hedge (safe haven) against inflation or exchange rate volatility conjoin to both the gold market condition and the nature of macroeconomic shocks. Moreover, we use the QQCOR results into a portfolio hedging strategy and further confirm gold’s usefulness in portfolio risk management in terms of return accumulation and risk reduction with respect to a currency only investment.

Keywords: Dollarized economies; Gold and inflation; Exchange rate pass-through; Quantile on quantile regression (QQR); Quantile on quantile correlation (QQCOR); Portfolio strategy (search for similar items in EconPapers)
JEL-codes: C20 C58 G11 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:71:y:2021:i:c:p:82-99

DOI: 10.1016/j.iref.2020.08.014

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