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

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  • Sui, Meng
  • Rengifo, Erick W.
  • Court, Eduardo

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.

Suggested Citation

  • Sui, Meng & Rengifo, Erick W. & Court, Eduardo, 2021. "Gold, inflation and exchange rate in dollarized economies – A comparative study of Turkey, Peru and the United States," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 82-99.
    • Handle: RePEc:eee:reveco:v:71:y:2021:i:c:p:82-99
    DOI: 10.1016/j.iref.2020.08.014
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    Cited by:

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    2. Cheng, Sheng & Han, Lingyu & Cao, Yan & Jiang, Qisheng & Liang, Ruibin, 2022. "Gold-oil dynamic relationship and the asymmetric role of geopolitical risks: Evidence from Bayesian pdBEKK-GARCH with regime switching," Resources Policy, Elsevier, vol. 78(C).
    3. Golitsis, Petros & Gkasis, Pavlos & Bellos, Sotirios K., 2022. "Dynamic spillovers and linkages between gold, crude oil, S&P 500, and other economic and financial variables. Evidence from the USA," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    4. Angela Ifeanyi Ujunwa & Augustine Ujunwa & Emmanuel Onah & Nnenna Georgina Nwonye & Onyedikachi David Chukwunwike, 2021. "Extending the determinants of currency substitution in Nigeria: Any role for financial innovation?," South African Journal of Economics, Economic Society of South Africa, vol. 89(4), pages 590-607, December.
    5. Liu, Fang & Umair, Muhammad & Gao, Junjun, 2023. "Assessing oil price volatility co-movement with stock market volatility through quantile regression approach," Resources Policy, Elsevier, vol. 81(C).

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    More about this item

    Keywords

    Dollarized economies; Gold and inflation; Exchange rate pass-through; Quantile on quantile regression (QQR); Quantile on quantile correlation (QQCOR); Portfolio strategy;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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