A Monetary Explanation of Oil and Gold Prices During Postwar Stagflation and Recovery: 1957-1999

Abstract

This paper studies the effect of the inflation on oil and gold prices in the post-war period. It presents a monetary explanation of oil and gold pricing through a cash-in-advance economy. It tests the hypothesis that the oil and gold price rises, including those during the "oil shocks" in 1974 and 1979, were a consequence rather than a cause of accelerating inflation in the developed industrial world. Granger casuality and cointegration evidence support the model's prediction that the oil and gold price behavior can be explained by money supply changes. The evidence includes support for an asset price relation derived from the model that formalizes the monetary explanation.

Keywords: oil, gold, inflation, cointegration, cash-in-advance

JEL Classification: E31, E51, E13, Q43