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Central Banks and Gold Puzzles

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  • Joshua Aizenman
  • Kenta Inoue

Abstract

We study the curious patterns of gold holding and trading by central banks during 1979-2010. With the exception of several discrete step adjustments, central banks keep maintaining passive stocks of gold, independently of the patterns of the real price of gold. We also observe the synchronization of gold sales by central banks, as most reduced their positions in tandem, and their tendency to report international reserves valuation excluding gold positions. Our analysis suggests that the intensity of holding gold is correlated with ‘global power’ – by the history of being a past empire, or by the sheer size of a country, especially by countries that are or were the suppliers of key currencies. These results are consistent with the view that central bank’s gold position signals economic might, and that gold retains the stature of a ‘safe haven’ asset at times of global turbulence. The under-reporting of gold positions in the international reserve/GDP statistics is consistent with loss aversion, wishing to maintain a sizeable gold position, while minimizing the criticism that may occur at a time when the price of gold declines.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17894.

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Date of creation: Mar 2012
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Publication status: published as Aizenman, Joshua & Inoue, Kenta, 2013. "Central banks and gold puzzles," Journal of the Japanese and International Economies, Elsevier, vol. 28(C), pages 69-90.
Handle: RePEc:nbr:nberwo:17894

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References

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  1. Dominguez, Kathryn M.E. & Hashimoto, Yuko & Ito, Takatoshi, 2012. "International reserves and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 388-406.
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  4. Aizenman, Joshua & Chinn, Menzie D. & Ito, Hiro, 2011. "Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma," Journal of the Japanese and International Economies, Elsevier, vol. 25(3), pages 290-320, September.
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  9. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt44g3n2j8, Center for International Economics, UC Santa Cruz.
  10. Aizenman, Joshua & Marion, Nancy P., 2003. "International Reserve Holdings with Sovereign Risk and Costly Tax Collection," Santa Cruz Center for International Economics, Working Paper Series, Center for International Economics, UC Santa Cruz qt9s7978n1, Center for International Economics, UC Santa Cruz.
  11. Baur, Dirk G. & McDermott, Thomas K., 2010. "Is gold a safe haven? International evidence," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1886-1898, August.
  12. Joshua Aizenman & Reuven Glick, 2008. "Sovereign Wealth Funds: Stylized Facts about their Determinants and Governance," NBER Working Papers 14562, National Bureau of Economic Research, Inc.
  13. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
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  16. Joshua Aizenman & Nancy Marion, 2002. "The high demand for international reserves in the Far East: what's going on?," Pacific Basin Working Paper Series 2002-08, Federal Reserve Bank of San Francisco.
  17. Pablo García & Claudio Soto, 2004. "Large Hoardings of International Reserves: Are They Worth It?," Working Papers Central Bank of Chile 299, Central Bank of Chile.
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  20. Yin-Wong Cheung & Hiro Ito, 2009. "A Cross-Country Empirical Analysis of International Reserves," CESifo Working Paper Series 2654, CESifo Group Munich.
  21. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
  22. Joshua Aizenman & Kenta Inoue, 2012. "Central Banks and Gold Puzzles," NBER Working Papers 17894, National Bureau of Economic Research, Inc.
  23. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 49(4), pages 1057-72, June.
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Cited by:
  1. Aizenman, Joshua & Inoue, Kenta, 2013. "Central banks and gold puzzles," Journal of the Japanese and International Economies, Elsevier, vol. 28(C), pages 69-90.
  2. Beckmann, Joscha & Czudaj, Robert, 2013. "Gold as an inflation hedge in a time-varying coefficient framework," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 208-222.
  3. Joscha Beckmann & Theo Berger & Robert Czudaj, 2014. "Does Gold Act as a Hedge or a Safe Haven for Stocks? A Smooth Transition Approach," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0502, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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