Turning over a golden leaf? : Global liquidity and emerging market central banks’ demand for gold after the financial crisis

Abstract

The quantity of gold reserves held by central banks in emerging markets and developing economies (EMDEs) has risen sharply following the global financial crisis in 2008. This paper examines factors driving holding of gold by central banks in 50 EMDEs using a dynamic panel generalized method of moments model. We find that monetary expansion in advanced economies is robustly related to the post-crisis increase in EMDE gold reserves, after controlling for domestic factors and changes in the global risk environment. This effect holds across different measures of global liquidity, and is robust to alternate model specifications, inclusion of additional covariates, and alternate estimation methods. We argue that the unprecedented monetary expansion in advanced economies has resulted in a shift in EMDE reserve asset holding strategy, resulting in continued accumulation of gold reserves even after the peak of the financial crisis.