The potential for a structural break in the relationship can be tested by including a dummy variable that represents the sterilization period (December through January ). Figure . Gold stock, non-sterilized gold stock and monetary base Source: Monetary base: Friedman and Schwartz (, table B-, column ). Gold stock: Board of Governors of the Federal Reserve System (, table ). For sterilization, see Table A in the appendix below. Table I. Impact of changes in gold reserves on the monetary base dependent variable: change in monetary base Gold stock – not controlling for sterilization Gold stock – adjusted for sterilization Change in gold stock .* (.) .* (.) Change in gold stock X sterilization period dummy −.* (.) −. (.) R . . Note: time period: March – December (N = ). Robust standard errors in parentheses. The second regression includes a dummy variable for September , as it is unclear how the small remainder of the sterilized gold was desterilized. *indicates statistical significance at percent level. GOLD STERILIZATION AND THE RECESSION OF – The results in Table simply confirm the pattern in Figure . Changes in the gold stock explain changes in the monetary base very well, except during the period of sterilization. The coefficient on the interaction between the change in the gold stock and a dummy variable representing the sterilization period is nearly equal and opposite to the sign of the coefficient on the change in the gold stock, reflecting the sterilization offset. By contrast, the relationship between the monetary base and a measure of the monetized gold stock (adjust for sterilization) shows no structural break during this period. Furthermore, this equation can be estimated for the period through and then used to generate an out-of-sample forecast of the monetary base using actual gold flows.
This indicates how the monetary base would have behaved without sterilization, given the actual changes in the gold stock. This confirms the earlier conclusion that, by the fourth quarter of , the monetary base was percent smaller than it would have been had gold not been sterilized. Such a forecast raises the question of whether the observed inflows of gold in can be taken as given, or whether they were affected by the sterilization program. One argument is that the observed gold flows between December and August were unaffected by the sterilization program.