THE GEOPOLITICAL "PUZZLE" OF THE CENTRAL BANK’S SWITCH TO GOLD
DOI:
https://doi.org/10.2478/eoik-2023-0018Keywords:
gold, currency reserves, central banks, geopolitical risks, reserve diversification, military expendituresAbstract
Gold holdings increased during recent time. Geopolitical factors could be responsible for such shift taking into account rising number of conflicts in the world since 2014. However, optimal share for gold in external assets is still disputable. The paper provides empirical tests to identify political economy factors of central bank’s gold holdings. The paper imply two empirical approaches: analysis of how gold reserves in tones and as a share of reserves distributed among the countries with different political regimes; logit regression to identify role of political economy factors that may push countries’ switch to gold. Results of empirical analysis shows that political regime itself is not obvious driving force of gold share. Excluding developed countries, it is possible to see that
autocracies do not outperform democracies in terms of mean and median share of gold systematically. Countries demonstrated shifts toward gold early then reference point of 2014 year despite political regime. Logit regression also helps to see that countries heavily have being exposing to gold are more likely hoarding large exchange reserves and politically stable. Proxies of geopolitical aggressiveness are valid with some covenants. While Global Peace Index is well proxy to identify geopolitical preconditions of countries’ switch to gold, military expenditures are not. This means that geopolitical motives of gold hoarding probably work directly and indirectly through exchange reserves accumulation and supportive political stability. Geopolitical aggressiveness that coincides
with only large military expenditures but not with reserves accumulation is likely to stand on weak economic ground.
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