Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Summary of WP/92/51
“Exchange Rates, Country Preferences, and Gold” by Michael P. Dooley, Peter Isard, and Mark P. Taylor
This paper tests indirectly the hypothesis that exchange rate movements may largely reflect changes in preferences for holding claims on different countries. It is argued that changes in country preferences will be reflected systematically in the price of gold and, hence, that gold price movements should have power to explain exchange rate movements over and above the predicted effects of monetary shocks. The argument is based on the concept of gold as “an asset without a country,” which suggests that shocks that change relative preferences for holding claims on different countries will also change preferences for holding gold relative to holding claims on any particular country.
The paper applies multivariate vector autoregression and cointegration modeling techniques to test for the short- and long-run influence of gold prices on exchange rates conditional on other monetary and real macro-economic variables, and applies the resulting error-correction exchange rate equation in out-of-sample forecasting exercises. It also compares the apparent explanatory power of movements in the price of gold with that of movements in the price of wheat, which is not generally held as an asset. The paper’s investigations yield quite strong support for the hypothesis.