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Does Inflation Cause Gold Prices? Evidence from G7 Countries

Mehmet Balcilar, Zeynel Ozdemir (), Muhammad Shahbaz and Serkan Gunes
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Serkan Gunes: Gazi University, Ankara, Turkey

No 15-31, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: This paper utilises the newly proposed nonparametric causality-in-quantiles test to examine the predictability of returns and the volatility of gold 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 utilising tests for nonlinearity. These tests identify nonlinearity, as 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 returns via quantiles 0.20 to 0.70, implying that very low- and high-return movements in gold markets are not related to inflation. These changes in low- and high-level gold returns 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 0.20 to 0.70. Our results show that gold does not serve as a hedge against inflation during periods when gold returns are very low or very high, which are respectively quiet and highly volatile periods.

Keywords: Gold, Inflation, Spot and futures markets; Quantile causality (search for similar items in EconPapers)
JEL-codes: C22 E31 Q02 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-mac and nep-rmg
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