Estimating a Cagan-type demand function for gold: 1561-1913

Long times series on production of gold and the value of gold, taken from Jastram’s book The Golden Constant, are used to estimate a Cagan-type demand function that relates the real total value of gold to its expected rate of return. The model assumes that gold production and a latent scale variable (income or consumption) are jointly exogenous and that the data are measured with error. The data reject the model: the estimates imply that the real value of gold varies a great deal relative to the expected return and depends negatively, rather than positively, on the expected return.