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A VARMA Test on the Gibson Paradox

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  • Chen, Chung
  • Lee, Chi-Wen Jevons

Abstract

We applied the VARMA test to examine the dynamic relation between prices and interest rates. The dynamic relation, which is important to characterize the nature of the Gibson paradox, provides economists new insight in discriminating against competing theories. In light of our empirical findings, all theories in the literature lose their persuasiveness. We found some evidence of unidirectional relation from prices to interest rates, but we found no evidence of unidirectional relation from interest rates to prices. Hence, the business cycle explanations advanced by Wicksell (1907), Keynes (1930), Lee and Petruzzi (1986), and Barsky and Summers (1988) are especially in jeopardy. A century and a half after its birth, this paradox is more puzzling than ever. Copyright 1990 by MIT Press.

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  • Chen, Chung & Lee, Chi-Wen Jevons, 1990. "A VARMA Test on the Gibson Paradox," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 96-107, February.
    • Handle: RePEc:tpr:restat:v:72:y:1990:i:1:p:96-107
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    Cited by:

    1. Serge Coulombe, 1998. "A Non-Paradoxical Interpretation of the Gibson Paradox," Staff Working Papers 98-22, Bank of Canada.
    2. Fedotenkov, Igor, 2015. "Population ageing and prices in an OLG model with money created by credits," MPRA Paper 66056, University Library of Munich, Germany.
    3. F. Barran & V. Coudert & B. Mojon, 1997. "Interest rates, banking spreads and credit supply: the real effects," The European Journal of Finance, Taylor & Francis Journals, vol. 3(2), pages 107-136.
    4. Takada, Hirokazu & Bass, Frank M., 1998. "Multiple Time Series Analysis of Competitive Marketing Behavior," Journal of Business Research, Elsevier, vol. 43(2), pages 97-107, October.
    5. Cheng, Hao & Kesselring, Randall G. & Brown, Christopher R., 2013. "The Gibson paradox: Evidence from China," China Economic Review, Elsevier, vol. 27(C), pages 82-93.
    6. Fedotenkov, Igor, 2018. "Population ageing and inflation with endogenous money creation," Research in Economics, Elsevier, vol. 72(3), pages 392-403.

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