The causal nexus of interest rate policy and gold market: The case of Turkey

• Published date: 01 February 2021
• Author: Hakan Yildirim,Andrew A. Alola,Hakan Eren Sengelen
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2142

ACADEMIC PAPER

The causal nexus of interest rate policy and gold market:

The case of Turkey

Hakan Yildirim

1

| Andrew A. Alola

2

| Hakan Eren Sengelen

3

1

Faculty of Economics, Administrative and

Social Sciences, International Logistics and

Transportation, Istanbul Gelis¸im University,

Istanbul, Turkey

2

Faculty of Economics, Administrative and

Social Sciences, Istanbul Gelis¸im University,

Istanbul, Turkey

3

Business Administration, Istanbul Esenyurt

University, Istanbul, Turkey

Correspondence

Andrew A. Alola, Faculty of Economics,

Administrative and Social Sciences, Istanbul

Gelis¸im University, Istanbul, Turkey.

Email: aadewale@gelisim.edu.tr

The relevance of gold to the financial market and global economies is responsible for

the commodity's (gold) link with financial instruments such as the oil price, currency

and gold price, stock index, and other commodities price. In this case, the causal anal-

ysis between the interest rate and the gold price has been examined in a novel

approach. This study uses the standard Granger causality approach to test the rela-

tionship for the economy of Turkey over the period June 1, 2000–June 1, 2017. The

results revealed that while gold price depends on daily announcements, demand, and

supply, the interest rate depends on some factors such as the monetary policy of the

central bank, inflation rate, and different macroeconomic parameters. Thus, the cau-

sality between the two financial instruments is observed to be significant. According

to the conducted statistical analysis, the interest rate and gold price have interaction

between each other. Because there is insufficient evidence in the extant literature

that establishes a causality relationship between the two variables, the current study

is believed to enhance policy directives and contribute to the financial literature.

Considering the peculiar situation of the Turkish financial market, this novel approach

presents significant policy directions.

1|INTRODUCTION

In the contemporary time, it has been commonly inferred that gold as

a commodity has rarely lost its charm. Until now, gold has been used

as a piece of jewelry and as a means of reserve from the past to the

present. In addition to being a precious metal that gives confidence to

households, it is used as a means of reserve by countries. Therefore, it

is an important research field in the price movements and the factors

affected by gold, which is accepted as an important investment tool in

the whole world. Several economic determinants such as the force of

supply and demand, inflation rates, Dollar exchange rate, and state

reserves have an effective role on gold prices. The gold prices, in par-

ticular, correspond to the Dollar, emphasizing the importance of the

Federal Reserve Department (FRED). The interest rates of the Federal

Reserve have a significant impact on gold prices. However, the inter-

est rates in most performing economics across the globe have been

significantly observed to affect handful of economic indicators and

dynamics (Alola et al., 2019; Alola & Alola, 2019; Alola, Asongu, &

Alola, 2019).

Given the above motivation, the need to study the relationship

between interest rate and Gold price has not been more pressing

than now. For obvious reason(s), the investors who intend to invest

will tend to buy more gold due to higher return guarantee and

higher lending rates. Therefore, the dynamics between common

financial and economic indicators is worthy of note. For instance,

the level of supply and demand, inflation rates, Dollar exchange

rate, and state reserves, as well as the relationship between inter-

est rates and gold prices, should be known well by investors.

Hence, the current study adopts Turkey because it has a structure

that is orientated toward individual investment profile and risk-

averse investment instruments which guarantee returns. Turkish

investors generally avoid risks by choosing investment instruments

such as deposit interest and gold. They prefer a deposit rate that

provides a constant monthly return as well as an investment in gold

hoping that gold will rise continuously. This study tests the interac-

tion between grams' gold prices and deposit rates announced by

the Central Bank of the Republic of Turkey in the short and

long term.

Received: 7 September 2019 Revised: 26 November 2019 Accepted: 28 February 2020

DOI: 10.1002/pa.2142

J Public Affairs. 2021;21:e2142. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of6

https://doi.org/10.1002/pa.2142