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Dynamic transmission effects between the interest rate, the US dollar, and gold and crude oil prices

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  • Wang, Yu Shan
  • Chueh, Yen Ling

Abstract

This paper shows that in the short term both gold and crude oil prices positively influence each other. Interest rates have a negative influence on the future gold prices and a positive influence on the future crude oil prices. In the long run, a relationship exists whereby interest rates influence the US dollar, which in turn influences international crude oil prices. When the Federal Reserve Board (Fed) lowers interest rates to boost the economy, market expectations for oil demand change and, as a result, crude oil prices fluctuate. In addition, there is a price transmission relationship from interest rates to gold prices. A reduction in interest rates influences investor expectations with respect to depreciation of the dollar. Investors then move their capital to the gold market for capital preservation or speculation. Finally, international gold and crude oil prices have feedback effects on interest rates. This paper infers that crude oil prices increasing to a certain level trigger inflation, at which juncture the Fed may tighten monetary policies to downturn the bloom economy.

Suggested Citation

  • Wang, Yu Shan & Chueh, Yen Ling, 2013. "Dynamic transmission effects between the interest rate, the US dollar, and gold and crude oil prices," Economic Modelling, Elsevier, vol. 30(C), pages 792-798.
    • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:792-798
    DOI: 10.1016/j.econmod.2012.09.052
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    More about this item

    Keywords

    Interest rate; Oil price; Gold price; Threshold model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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