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Gibson's Paradox and the Gold Standard

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Author Info
Robert B. Barsky
Lawrence H. Summers

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Abstract

This paper provides a new explanation for Gibson's Paradox -- the observation that the price level and the nominal interest rate were positively correlated over long periods of economic history. We explain this phenomenon interms of the fundamental workings of a gold standard. Under a gold standard, the price level is the reciprocal of the real price of gold. Because gold is adurable asset, its relative price is systematically affected by fluctuations inthe real productivity of capital, which also determine real interest rates. Our resolution of the Gibson Paradox seems more satisfactory than previous hypotheses. It explains why the paradox applied to real as well as nominal rates of return, its coincidence with the gold standard period, and the co-movement of interest rates, prices, and the stock of monetary gold during the gold standard period. Empirical evidence using contemporary data on gold prices and real interest rates supports our theory.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1680.

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Date of creation: Feb 1990
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Publication status: published as Journal of Political Economy, Vol. 96, No. 3, pp. 528-550, (June 1988).
Handle: RePEc:nbr:nberwo:1680

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Levhari, David & Pindyck, Robert S, 1981. "The Pricing of Durable Exhaustible Resources," The Quarterly Journal of Economics, MIT Press, vol. 96(3), pages 365-77, August. [Downloadable!] (restricted)
  2. Barro, Robert J, 1979. "Money and the Price Level under the Gold Standard," Economic Journal, Royal Economic Society, vol. 89(353), pages 13-33, March. [Downloadable!] (restricted)
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  3. Sargent, Thomas J, 1973. "Interest Rates and Prices in the Long Run: A Study of the Gibson Paradox," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 385-449, Part II F. [Downloadable!] (restricted)
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  4. Michael D. Bordo, 1981. "The classical gold standard: some lessons for today," Review, Federal Reserve Bank of St. Louis, issue May, pages 2-17. [Downloadable!]
  5. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Halicioglu, Ferda, 2004. "The Gibson Paradox: An Empirical Investigation for Turkey," MPRA Paper 3556, University Library of Munich, Germany. [Downloadable!]
  2. Jeffrey A. Frankel, 2006. "The Effect of Monetary Policy on Real Commodity Prices," NBER Working Papers 12713, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Michael D. Bordo & Finn E. Kydland, 1992. "The gold standard as a rule," Working Paper 9205, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  4. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Robert B. Barsky & J. Bradford De Long, 1992. "Why Does the Stock Market Fluctuate?," NBER Working Papers 3995, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Coulombe, Serge, 1998. "A Non-Paradoxical Interpretation of the Gibson Paradox," Working Papers 98-22, Bank of Canada. [Downloadable!]
  7. Robert B. Barsky & J. Bradford De Long, 1988. "Forecasting Pre-World War I Inflation: The Fisher Effect Revisited," NBER Working Papers 2784, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Paul Evans & Xiaojun Wang, 2005. "A Tale of Two Effects," Working Papers 200506, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
    Other versions:
  9. Robert B. Barsky & J. Bradford De Long, . "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," J. Bradford De Long's Working Papers _121, University of California at Berkeley, Economics Department. [Downloadable!]
    Other versions:
  10. F. Barran, V. Coudert, B. Mojon, 1997. "Interest rates, banking spreads and credit supply: the real effects," European Journal of Finance, Taylor and Francis Journals, vol. 3(2), pages 107-136, June. [Downloadable!] (restricted)
    Other versions:
  11. Christophe Faugere & Julian Van Erlach, 2004. "The Price of Gold: A Global Required Yield Theory," Finance 0403003, EconWPA. [Downloadable!]
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