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Does Inflation Cause Gold Market Price Changes? Evidence on the G7 Countries from the Tests of Nonparametric Quantile Causality in Mean and Variance

Mehmet Balcilar, Zeynel Ozdemir (), Muhammad Shahbaz and Serkan Gunes

MPRA Paper from University Library of Munich, Germany

Abstract: This paper utilises 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 utilising 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.

Keywords: Gold, Inflation, Spot and futures markets; Quantile causality (search for similar items in EconPapers)
JEL-codes: A1 (search for similar items in EconPapers)
Date: 2017-09-05, Revised 2017-09-13
New Economics Papers: this item is included in nep-cba
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Journal Article: Does inflation cause gold market price changes? evidence on the G7 countries from the tests of nonparametric quantile causality in mean and variance (2018) Downloads
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