Adriana Souza

Date of Award

2017

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Khemraj, Tarron

Area of Concentration

Economics

Abstract

This thesis looks into how much gold central banks in emerging economies should hold when targeting the exchange rate. To answer the question, mean-variance portfolio analysis, time-series data on gold and US Treasuries, and the assumption that a central bank seeks to minimize risk associated with these holdings were used. The analytical model proposed provides a framework for numerical simulations of a shadow price – interpreted as the central bank’s sacrifice of policy precision of the target given one additional unit of portfolio variance. The results suggest a two-regime demand for gold: from 0 to 21 percent, with a lower but unstable policy sacrifice, and from 40 to 60 percent. Additionally, the findings suggest that the exchange rate target is unaffected by the higher volatility of monthly returns on gold.

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