Working Paper: NBER ID: w1300
Authors: Behzad T. Diba; Herschel I. Grossman
Abstract: This paper describes a theoretical and empirical study of the possibility of rational bubbles in the relative price ofgold. The critical implication of the theoretical analysis is that, if rational bubbles exist, the time series of the relative price of gold, as well as any time series obtained by differencing a finite number of times, is nonstationary. The empirical evidence relating to this nonstationarity property involves diagnostic checks for stationarity carried out in both the time domain and the frequency domain. This evidence strongly suggests that the process generating the first difference of the log of the relative price of gold is stationary, a finding that is inconsistent with the existence of rational bubbles. More broadly, the empirical analysis finds a close correspondence between the time series properties of the relative price of gold and the time series properties of real interest rates,which the theory relates to the time series properties of the fundamental component of the relative price of gold. In sum, the evidence is consistent with the combined conclusion that the relative price of gold corresponds to market fundamentals, that the process generating first differences of market fundamentals is stationary, and that actual price movements do not involve rational bubbles.
Keywords: Gold; Rational Bubbles; Market Fundamentals
JEL Codes: G12; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Rational bubbles exist in the price of gold (G19) | The time series of the relative price of gold is nonstationary (E39) |
| The time series of the relative price of gold is nonstationary (E39) | Any finite differencing of this series yields nonstationary results (C22) |
| The processes generating the prices of gold are stationary (E39) | Existence of rational bubbles is contradicted (E32) |
| Price movements are attributable to market fundamentals (G19) | Price fluctuations during the sample period did not involve rational bubbles (E32) |
| The time series properties of the relative price of gold correspond to real interest rates (E43) | Price movements are attributable to market fundamentals (G19) |
| The first difference of the log of the relative price of gold is stationary (E39) | Price fluctuations during January 1975 to March 1983 did not involve rational bubbles (E32) |