THE PRICE OF GOLD AND THE EXCHANGE RATE: EVIDENCE FROM THRESHOLD COINTEGRATION AND THRESHOLD GRANGER CAUSALITY ANALYSES FOR TURKEY

Abstract

This paper explores the relationship between gold prices and the US dollar/Turkish lira exchange rate between 1990-2011 by using cointegration and Granger causality analyses. The empirical findings indicate that there is a threshold cointegration relationship between the two variables. The threshold value obtained from the estimation of threshold vector error correction model equals -3.268. The Granger test indicates that there is evidence of a bi-directional causal relationship between gold prices and the exchange rate, except when the threshold parameter exceeds the threshold value in the exchange rate equation. According to these findings, gold price can be used as a hedge against the exchange rate. However, since this relationship disappears above the threshold value, gold is only a weak hedge against exchange rate fluctuations.