Central Bank Gold Reserves and Sovereign Credit Risk

14 Pages Posted: 22 Mar 2021

See all articles by Sawan Rathi

Sawan Rathi

Indian Institute of Management Ahmedabad

Sanket Mohapatra

Indian Institute of Management Ahmedabad

Arvind Sahay

Indian Institute of Management (IIM), Ahmedabad

Date Written: March 20, 2021

Abstract

Gold holdings with central banks are often considered to play a stabilizing role in times of crisis. This study performs a cross-country panel data analysis of developed and developing countries to determine whether gold holdings of central banks contribute to sovereign creditworthiness. Our analysis confirms that an increase in central bank gold reserves reduces the credit default swap (CDS) spreads of a country. We also observe that during global crisis and country-specific crisis episodes, the role of central bank gold becomes even more important. In robustness tests, we account for potential endogeneity of central bank gold reserves using a Generalized Method of Moments (GMM) approach. The findings highlight the importance of gold in central bank reserves and indicate a positive role of gold in mitigating a nation's external vulnerabilities in an uncertain global economic environment.

Keywords: Central bank gold reserves; Country risk; Credit default swap spreads

JEL Classification: E58; G01; G11

Suggested Citation

Rathi, Sawan and Mohapatra, Sanket and Sahay, Arvind, Central Bank Gold Reserves and Sovereign Credit Risk (March 20, 2021). Available at SSRN: https://ssrn.com/abstract=3808521 or http://dx.doi.org/10.2139/ssrn.3808521

Sawan Rathi

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, 380015
India

Sanket Mohapatra (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Wing 1-F, IIM Old Campus
Vastrapur
Ahmedabad, 380015
India

Arvind Sahay

Indian Institute of Management (IIM), Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380 015
India

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