The meteoric rise of Bitcoin has led to heightened investment, academic, commercial, numismatic, transactional, and practitioner interest in that cryptocurrency, as well as in the growing array of such instruments worldwide. This leads to an accentuated need for an examination of the historical evolution of Bitcoin as the seminal instrument in the development of cryptocurrencies, and this discussion paper seeks to address that gap.
{"title":"A History of Bitcoin","authors":"Usman W. Chohan","doi":"10.2139/SSRN.3047875","DOIUrl":"https://doi.org/10.2139/SSRN.3047875","url":null,"abstract":"The meteoric rise of Bitcoin has led to heightened investment, academic, commercial, numismatic, transactional, and practitioner interest in that cryptocurrency, as well as in the growing array of such instruments worldwide. This leads to an accentuated need for an examination of the historical evolution of Bitcoin as the seminal instrument in the development of cryptocurrencies, and this discussion paper seeks to address that gap.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"17 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80325636","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. We show that a stable and competitive RER policy may correct for this externality and other related market failures. The resulting development of these sectors leads to overall faster economic growth. A system of effectively multiple exchange rates is required when spillovers across different tradable sectors differ. The impact of RER policies is increased when they are complemented by traditional industrial policies that increase the elasticity of the aggregate supply to the RER. Among the instruments required to implement a stable and competitive RER are interventions in the foreign exchange market and regulation of capital flows. We also discuss the trade-offs associated with alternative stable and competitive RER policies.
{"title":"Real Exchange Rate Policies for Economic Development","authors":"Martin M Guzman, J. Ocampo, J. Stiglitz","doi":"10.3386/W23868","DOIUrl":"https://doi.org/10.3386/W23868","url":null,"abstract":"This paper analyzes the role of real exchange rate (RER) policies in promoting economic development. Markets provide a suboptimal amount of investment in sectors characterized by learning spillovers. We show that a stable and competitive RER policy may correct for this externality and other related market failures. The resulting development of these sectors leads to overall faster economic growth. A system of effectively multiple exchange rates is required when spillovers across different tradable sectors differ. The impact of RER policies is increased when they are complemented by traditional industrial policies that increase the elasticity of the aggregate supply to the RER. Among the instruments required to implement a stable and competitive RER are interventions in the foreign exchange market and regulation of capital flows. We also discuss the trade-offs associated with alternative stable and competitive RER policies.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"14 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81684510","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A vibrant body of research analyzes the impact of domestic political institutions on choice of exchange-rate regime. While most of this work focuses on regime type, I examine the relationship between institutional quality and monetary policy. I empirically assess two strands of theoretical work that address the policy side of the equation: an extension of the logic underlying the autocracy-democracy divide, and the underappreciated Huang-Wei (2006) model. I find little consistent evidence of a link between weak institutions and choice of monetary anchor, although institutional quality is inversely related to inflation, an effect that persists when accounting for exchange-rate pegs and central bank independence. I also examine the effects of weak institutions on private-sector inflation concerns, finding that (perceived) weak institutions increase inflation concerns.
{"title":"The Political Economy of Institutional Quality and Monetary Policy","authors":"M. Plouffe","doi":"10.2139/ssrn.3020249","DOIUrl":"https://doi.org/10.2139/ssrn.3020249","url":null,"abstract":"A vibrant body of research analyzes the impact of domestic political institutions on choice of exchange-rate regime. While most of this work focuses on regime type, I examine the relationship between institutional quality and monetary policy. I empirically assess two strands of theoretical work that address the policy side of the equation: an extension of the logic underlying the autocracy-democracy divide, and the underappreciated Huang-Wei (2006) model. I find little consistent evidence of a link between weak institutions and choice of monetary anchor, although institutional quality is inversely related to inflation, an effect that persists when accounting for exchange-rate pegs and central bank independence. I also examine the effects of weak institutions on private-sector inflation concerns, finding that (perceived) weak institutions increase inflation concerns.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-08-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73951147","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops a new theoretical model with an asymmetric informal one-sided exchange rate target zone, with an application to the Swiss franc following the removal of the minimum exchange rate of CHF 1.20 per euro in January 2015. We extend and generalize the standard target zone model of Krugman (1991) by introducing perceived uncertainty about the lower edge of the band. We find that informal soft edge target zone bands lead to weaker honeymoon effects, wider target zone ranges and higher exchange rate volatility than formal target zone bands. These results suggest that it would be beneficial for exchange rate policy intentions to be stated clearly in order to anchor exchange rate expectations and reduce exchange rate volatility. We also study how exchange rate dynamics can be characterized in models in which financial markets are aware of occasional changes in the policy regime. We show that expected changes in the central bank's exchange rate policy may lead to exchange rate oscillations, providing an additional source of exchange rate volatility, and to capture this it is important to take into account the possibility of regime changes in exchange rate policy.
{"title":"Informal One‐Sided Target Zone Model and the Swiss Franc","authors":"Yu-Fu Chen, M. Funke, R. Moessner","doi":"10.1111/roie.12352","DOIUrl":"https://doi.org/10.1111/roie.12352","url":null,"abstract":"This paper develops a new theoretical model with an asymmetric informal one-sided exchange rate target zone, with an application to the Swiss franc following the removal of the minimum exchange rate of CHF 1.20 per euro in January 2015. We extend and generalize the standard target zone model of Krugman (1991) by introducing perceived uncertainty about the lower edge of the band. We find that informal soft edge target zone bands lead to weaker honeymoon effects, wider target zone ranges and higher exchange rate volatility than formal target zone bands. These results suggest that it would be beneficial for exchange rate policy intentions to be stated clearly in order to anchor exchange rate expectations and reduce exchange rate volatility. We also study how exchange rate dynamics can be characterized in models in which financial markets are aware of occasional changes in the policy regime. We show that expected changes in the central bank's exchange rate policy may lead to exchange rate oscillations, providing an additional source of exchange rate volatility, and to capture this it is important to take into account the possibility of regime changes in exchange rate policy.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"140 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86140667","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper has made an attempt to evaluate the combined impact of crude oil prices and exchange rate on the performance of Indian stock market. As the impact of dollar nominated oil prices on stock prices may not be quite relevant for Indian context. Therefore, in this study WTI Crude oil prices per Dollars along with the USD/Rupee exchange rate would be more meaningful and relevant to understand the impact of oil prices on stock market by using monthly data from 2003 to 2016 for S&P CNX Nifty Index, WTI Crude oil prices per Barrel (Dollars) and Dollar/Rupee Exchange rate. All the series were found to be stationery at First difference. The Granger causality tests revealed that there exists a Bi directional causality between stock prices and exchange rates in the short run i.e. stock prices lead exchange rates in the short run, but result of Johansen cointegration suggested that there is no long run relationship between these two financial variables. The results of the Johansen cointegration test suggest absence of any long term relationship between WTI crude oil price, USD/Rupee exchange rate and stock prices in India. The result of forecast error variances suggested that USD/Rupee exchange rate is influenced by Stock market performance. The forecast error variances of USD/Rupee exchange rate is significantly explained by the value of Nifty. Results also indicate that the values of oil price and exchange rate are comparatively less exogenous than the Indian stock market. Particularly, the contribution of Stock market shocks to the USD/Rupee exchange rate is greater than that of WTI Crude oil price shocks in all the periods.
{"title":"Co-Integration and Causal Relationship Among Crude Oil Prices, Exchange Rate and Stock Market Performance: An Evidence From India","authors":"S. Shirodkar","doi":"10.18843/RWJASC/V8I3/12","DOIUrl":"https://doi.org/10.18843/RWJASC/V8I3/12","url":null,"abstract":"This paper has made an attempt to evaluate the combined impact of crude oil prices and exchange rate on the performance of Indian stock market. As the impact of dollar nominated oil prices on stock prices may not be quite relevant for Indian context. Therefore, in this study WTI Crude oil prices per Dollars along with the USD/Rupee exchange rate would be more meaningful and relevant to understand the impact of oil prices on stock market by using monthly data from 2003 to 2016 for S&P CNX Nifty Index, WTI Crude oil prices per Barrel (Dollars) and Dollar/Rupee Exchange rate. All the series were found to be stationery at First difference. The Granger causality tests revealed that there exists a Bi directional causality between stock prices and exchange rates in the short run i.e. stock prices lead exchange rates in the short run, but result of Johansen cointegration suggested that there is no long run relationship between these two financial variables. The results of the Johansen cointegration test suggest absence of any long term relationship between WTI crude oil price, USD/Rupee exchange rate and stock prices in India. The result of forecast error variances suggested that USD/Rupee exchange rate is influenced by Stock market performance. The forecast error variances of USD/Rupee exchange rate is significantly explained by the value of Nifty. Results also indicate that the values of oil price and exchange rate are comparatively less exogenous than the Indian stock market. Particularly, the contribution of Stock market shocks to the USD/Rupee exchange rate is greater than that of WTI Crude oil price shocks in all the periods.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"24 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-06-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86531032","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Torres, Thomas Goda, Santiago Sanchez, Adriana Romero
Spanish Abstract: Durante el periodo 2006-2013 Colombia experimento una de las apreciaciones reales mas fuertes del mundo. Durante este mismo periodo, el volumen de exportaciones manufactureras disminuyo cerca de un 50%, mientras el volumen de importaciones aumento cerca de la misma cantidad. Este trabajo busca determinar el efecto de la tasa de cambio real sobre los flujos de comercio internacional en el sector manufacturero. Para tal fin, y como principal aporte, se calculan indices de tasa de cambio real (TCR) subsectorial para 19 subsectores manufactureros, teniendo en cuenta la potencial existencia de heterogeneidades entre ellos. Se estiman ademas las elasticidades precio para exportaciones e importaciones usando los indices de tasa de cambio real bilateral y subsectorial. Los resultados indican la existencia de importantes diferencias entre el comportamiento de la TCR entre subsectores, y que estas diferencias explican el comportamiento de las exportaciones en los distintos sectores manufactureros, aunque los resultados no son tan claros para el caso de las importaciones. Estos resultados sugieren que los hacedores de politica deberian tener en cuenta los efectos diferenciales de sus politicas sobre el desempeno manufacturero cuando estas afectan la TCR. English Abstract: During the 2006-2013 period, Colombia experienced on the strongest appreciations in the world. During this same period, the volume of manufacturing exports fell nearly 50%, while the volume if imports rose in the same quantity. This work aims to determine the effect of the real exchange rate on the flow of international commerce in the manufacturing sector. For this end, and as a main approach, sub-sectoral real exchange rate indices are calculated for 19 manufacturing subsectors, noting the potential existence of heterogeneities between them. The price elasticities for exports and imports are also estimated using the bilateral and sub-sectoral real exchange rate index. The results indicate the existence of important differences between the behavior of the real exchange rate between subsectors, and that these differences explain the behavior of exports in the different manufacturing sectors, although the results are not so clear for the case of imports. These results suggest that policymakers should consider the differential effects of their policies on manufacturing performance when they affect the real exchange rate.
{"title":"Efectos Diferenciales De La Tasa De Cambio Real Sobre El Comercio Internacional En Colombia (Differential Effects of the Real Exchange Rate on International Trade in Colombia)","authors":"A. Torres, Thomas Goda, Santiago Sanchez, Adriana Romero","doi":"10.2139/SSRN.3003526","DOIUrl":"https://doi.org/10.2139/SSRN.3003526","url":null,"abstract":"Spanish Abstract: Durante el periodo 2006-2013 Colombia experimento una de las apreciaciones reales mas fuertes del mundo. Durante este mismo periodo, el volumen de exportaciones manufactureras disminuyo cerca de un 50%, mientras el volumen de importaciones aumento cerca de la misma cantidad. Este trabajo busca determinar el efecto de la tasa de cambio real sobre los flujos de comercio internacional en el sector manufacturero. Para tal fin, y como principal aporte, se calculan indices de tasa de cambio real (TCR) subsectorial para 19 subsectores manufactureros, teniendo en cuenta la potencial existencia de heterogeneidades entre ellos. Se estiman ademas las elasticidades precio para exportaciones e importaciones usando los indices de tasa de cambio real bilateral y subsectorial. Los resultados indican la existencia de importantes diferencias entre el comportamiento de la TCR entre subsectores, y que estas diferencias explican el comportamiento de las exportaciones en los distintos sectores manufactureros, aunque los resultados no son tan claros para el caso de las importaciones. Estos resultados sugieren que los hacedores de politica deberian tener en cuenta los efectos diferenciales de sus politicas sobre el desempeno manufacturero cuando estas afectan la TCR. \u0000English Abstract: During the 2006-2013 period, Colombia experienced on the strongest appreciations in the world. During this same period, the volume of manufacturing exports fell nearly 50%, while the volume if imports rose in the same quantity. This work aims to determine the effect of the real exchange rate on the flow of international commerce in the manufacturing sector. For this end, and as a main approach, sub-sectoral real exchange rate indices are calculated for 19 manufacturing subsectors, noting the potential existence of heterogeneities between them. The price elasticities for exports and imports are also estimated using the bilateral and sub-sectoral real exchange rate index. The results indicate the existence of important differences between the behavior of the real exchange rate between subsectors, and that these differences explain the behavior of exports in the different manufacturing sectors, although the results are not so clear for the case of imports. These results suggest that policymakers should consider the differential effects of their policies on manufacturing performance when they affect the real exchange rate.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79830169","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines the hypothesis that the boom in dollar credit in the emerging market economies is associated with excessively low interest rate in the US. For this purpose, we use a multivariate correlated unobserved component model that allows for correlation between shocks to dollar credit, interest rates and dollar index both in the short-run and in the long-run. In addition, it also provides us a quantitative estimate of the permanent and transitory movements in dollar credit in emerging markets, US interest rate and the dollar index. The results from this model do suggest that a temporary decline in interest rate and dollar index below their long-run levels are associated with an increase in dollar credit with a very high degree of negative correlation. The estimate of the cyclical component of the dollar credit in emerging market from our model captures the recent boom and bust in this market and compares favorably to a univariate trend-cycle decomposition benchmark.
{"title":"The Rise of Dollar Credit in Emerging Market Economies and Us Monetary Policy","authors":"Anni Huang, N. Kishor","doi":"10.1111/twec.12734","DOIUrl":"https://doi.org/10.1111/twec.12734","url":null,"abstract":"This paper examines the hypothesis that the boom in dollar credit in the emerging market economies is associated with excessively low interest rate in the US. For this purpose, we use a multivariate correlated unobserved component model that allows for correlation between shocks to dollar credit, interest rates and dollar index both in the short-run and in the long-run. In addition, it also provides us a quantitative estimate of the permanent and transitory movements in dollar credit in emerging markets, US interest rate and the dollar index. The results from this model do suggest that a temporary decline in interest rate and dollar index below their long-run levels are associated with an increase in dollar credit with a very high degree of negative correlation. The estimate of the cyclical component of the dollar credit in emerging market from our model captures the recent boom and bust in this market and compares favorably to a univariate trend-cycle decomposition benchmark.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"180 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85059350","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974–2009. Our results clearly indicate that a left‐wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes. Nevertheless, evidence is weaker when using the de jure IMF course classification, which is set up by Ilzetzki et al. ([Ilzetzki, E., 2008]). In a deeper investigation, we find that left‐wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of OECD, non‐OECD and non‐Eurozone countries, as the impacts from government ideology on the determinant of the choice of exchange rate regime in Eurozone countries disappear. More importantly, we present many explanations for exchange rate regime choices when macroeconomic conditions, political constraints and institutions impact the choice of exchange rate regime.
{"title":"The Effect of Government Ideology on an Exchange Rate Regime: Some International Evidence","authors":"Chun-ping Chang, Chien‐Chiang Lee","doi":"10.1111/twec.12018","DOIUrl":"https://doi.org/10.1111/twec.12018","url":null,"abstract":"This paper comprehensively investigates the effect of government ideology on the type of exchange rate regime that a country implements via multinomial logit and multinomial probit models for 147 countries in the period 1974–2009. Our results clearly indicate that a left‐wing government increases the likelihood that a country implements a flexible regime in the classifications of exchange rate regimes. Nevertheless, evidence is weaker when using the de jure IMF course classification, which is set up by Ilzetzki et al. ([Ilzetzki, E., 2008]). In a deeper investigation, we find that left‐wing governments are more likely to choose a flexible regime relative to a fixed one in our sample of OECD, non‐OECD and non‐Eurozone countries, as the impacts from government ideology on the determinant of the choice of exchange rate regime in Eurozone countries disappear. More importantly, we present many explanations for exchange rate regime choices when macroeconomic conditions, political constraints and institutions impact the choice of exchange rate regime.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"34 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80970657","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2017-03-01DOI: 10.5089/9781475589252.001.A001
A. Kireyev
The paper presents a simple framework for the analysis of the macroeconomic implications of de-cashing. Defined as replacing paper currency with convertible deposits, de-cashing would affect all key macroeconomic sectors. The overall macreconomic impact of de-cashing would depend on the balance of growth-enhancing and growth-constraining factors. Starting from a traditional saving-investment balance, the paper develops a four-sector macroeconomic framework. It is purely illustrative and is designed to provide a roadmap for a systematic evaluation of de-cashing. The framework is disaggregated into the real, fiscal, monetary, and external sectors and potential implications of de-cashing are then identified in each sector. Finally, the paper draws a balance on possible positive and negative macroeconomic implications of de-cashing, and proposes policies capable of augmenting its economic and social benefits, while reducing potential costs.
{"title":"The Macroeconomics of De-Cashing","authors":"A. Kireyev","doi":"10.5089/9781475589252.001.A001","DOIUrl":"https://doi.org/10.5089/9781475589252.001.A001","url":null,"abstract":"The paper presents a simple framework for the analysis of the macroeconomic implications of de-cashing. Defined as replacing paper currency with convertible deposits, de-cashing would affect all key macroeconomic sectors. The overall macreconomic impact of de-cashing would depend on the balance of growth-enhancing and growth-constraining factors. Starting from a traditional saving-investment balance, the paper develops a four-sector macroeconomic framework. It is purely illustrative and is designed to provide a roadmap for a systematic evaluation of de-cashing. The framework is disaggregated into the real, fiscal, monetary, and external sectors and potential implications of de-cashing are then identified in each sector. Finally, the paper draws a balance on possible positive and negative macroeconomic implications of de-cashing, and proposes policies capable of augmenting its economic and social benefits, while reducing potential costs.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"23 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80974548","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that are proportional to the market power of each country in the global gold market. Market power is defined as the impact that a change in a country’s exchange rate has on the price of gold expressed in other currencies. We use principal components analysis to reduce the set of global exchange rates to four currency ‘blocs’ representing the U.S. dollar, the euro, the commodity currencies and the Asian currencies, respectively. We estimate the weight of each currency bloc in the index in an error correction framework using a broad set of variables to control for the unobserved intrinsic value. We show that the resulting index is less volatile than the USD price of gold and, in contrast with the USD price of gold, has a strong negative relationship with global equities and a strong positive relationship with the VIX index, both of which underline the role of gold as a safe haven asset.
{"title":"The Intrinsic Value of Gold: An Exchange Rate-Free Price Index","authors":"Richard D. F. Harris, Jian Shen","doi":"10.2139/ssrn.2926454","DOIUrl":"https://doi.org/10.2139/ssrn.2926454","url":null,"abstract":"In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that are proportional to the market power of each country in the global gold market. Market power is defined as the impact that a change in a country’s exchange rate has on the price of gold expressed in other currencies. We use principal components analysis to reduce the set of global exchange rates to four currency ‘blocs’ representing the U.S. dollar, the euro, the commodity currencies and the Asian currencies, respectively. We estimate the weight of each currency bloc in the index in an error correction framework using a broad set of variables to control for the unobserved intrinsic value. We show that the resulting index is less volatile than the USD price of gold and, in contrast with the USD price of gold, has a strong negative relationship with global equities and a strong positive relationship with the VIX index, both of which underline the role of gold as a safe haven asset.","PeriodicalId":20949,"journal":{"name":"PSN: Exchange Rates & Currency (Comparative) (Topic)","volume":"17 2 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2017-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79472701","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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