Gold as an Infl ation Hedge in a Time-Varying Coefficient Framework

Joscha Beckmann and Robert Czudaj

No 362, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This study analyzes the question whether gold provides the ability of hedging against inflation from a new perspective. Using data for four major economies, namely the USA, the UK, the Euro Area, and Japan, we allow for nonlinearity and discriminate between long-run and time-varying short-run dynamics. Thus, we conduct a Markov-switching vector error correction model (MS-VECM) approach for a sample period ranging from January 1970 to December 2011. Our main findings are threefold: First, we show that gold is partially able to hedge future inflation in the long-run and this ability is stronger for the USA and the UK compared to Japan and the Euro Area. In addition, the adjustment of the general price level is characterized by regime-dependence, implying that the usefulness of gold as an inflation hedge for investors crucially depends on the time horizon. Finally, one regime approximately accounts for times of turbulences while the other roughly corresponds to 'normal times'.

Keywords: Cointegration; gold price; inflation hedge; Markov-switching error correction (search for similar items in EconPapers)
JEL-codes: C32 E31 E44 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (5)

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Journal Article: Gold as an inflation hedge in a time-varying coefficient framework (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:362

DOI: 10.4419/86788416

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