Was the Gibson Paradox for real? A wicksellian study of the relationship between interest rates and prices

Chadha, Jagjit S. and Perlman, Morris (2014) Was the Gibson Paradox for real? A wicksellian study of the relationship between interest rates and prices. Economic History working paper series (204/2014). Department of Economic History, London School of Economics and Political Science, London, UK.

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Abstract

We examine the relationship between prices and interest rates for seven advanced economies in the period up to 1913, emphasizing the UK. There is a significant long-runpositive relationship between prices and interest rates for the core commodity standard countries. Keynes (1930) labelled this positive relationship the Gibson Paradox. A number of theories have been put forward as possible explanations of the Paradox but they do not fit the long-run pattern of the relationship. We find that a formal model in the spirit of Wicksell (1907)and Keynes (1930) offers an explanation for the paradox: where the need to stabilize the banking sector’s reserve ratio, in the presence of an uncertain natural rate, can lead to persistent deviations of the market rate of interest from its natural level and consequently long run swings in the price level.

Item Type:	Monograph (Working Paper)
Official URL:	https://www.lse.ac.uk/Economic-History/Working-Pap...
Additional Information:	© 2014 The Authors
Divisions:	Economic History
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	B - Schools of Economic Thought and Methodology > B2 - History of Economic Thought since 1925 > B22 - Macroeconomics E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes; Keynesian; Post-Keynesian E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System
Date Deposited:	02 Jun 2014 07:36
Last Modified:	15 Sep 2024 17:06
URI:	http://eprints.lse.ac.uk/id/eprint/56896

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