Exchange rates, country-specific shocks, and gold

Abstract

The hypothesis that exchange rate movements reflect country-specific shocks is supported indirectly by theorizing that country-specific shocks should also be reflected systematically in the price of gold and by confirming that gold price movements have explanatory power with respect to exchange rate movements ceteris paribus. This paper applies multivariate vector autoregression and cointegration modelling techniques to test for the short- and long-run influences of gold prices on exchange rates conditional on other monetary and real macroeconomic variables, and applies the resulting error correction exchange rate equation to out of sample forecasting exercises