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Gibson's Paradox and the Gold Standard

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  • Robert B. Barsky
  • Lawrence H. Summers

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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Handle: RePEc:nbr:nberwo:1680

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References

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  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.
  2. 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.
  3. Michael D. Bordo, 1981. "The classical gold standard: some lessons for today," Review, Federal Reserve Bank of St. Louis, issue May, pages 2-17.
  4. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  5. 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.
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Citations

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Cited by:
  1. Froot, Kenneth A & Klemperer, Paul D, 1989. "Exchange Rate Pass-Through When Market Share Matters," American Economic Review, American Economic Association, vol. 79(4), pages 637-54, September.
  2. Robert J. Barro, 1986. "Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918," NBER Working Papers 2005, National Bureau of Economic Research, Inc.
  3. Barsky, Robert B & De Long, J Bradford, 1993. "Why Does the Stock Market Fluctuate?," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 291-311, May.
  4. Halicioglu, Ferda, 2004. "The Gibson Paradox: An Empirical Investigation for Turkey," MPRA Paper 3556, University Library of Munich, Germany.
  5. Jeffrey A. Frankel, 2006. "The Effect of Monetary Policy on Real Commodity Prices," NBER Working Papers 12713, National Bureau of Economic Research, Inc.
  6. Michael D. Bordo & Finn E. Kydland, 1992. "The gold standard as a rule," Working Paper 9205, Federal Reserve Bank of Cleveland.
  7. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
  8. Willem H. Buiter, 1989. "A "Gold Standard" Isn't Viable Unless Supported by Sufficiently FlexibleMonetary and Fiscal Policy," NBER Working Papers 1903, National Bureau of Economic Research, Inc.
  9. Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc.
  10. Coulombe, Serge, 1998. "A Non-Paradoxical Interpretation of the Gibson Paradox," Working Papers 98-22, Bank of Canada.
  11. 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.
  12. Paul Evans & Xiaojun Wang, 2005. "A Tale of Two Effects," Working Papers 200506, University of Hawaii at Manoa, Department of Economics.
  13. Barsky, Robert B & De Long, J Bradford, 1991. "Forecasting Pre-World War I Inflation: The Fisher Effect and the Gold Standard," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 815-36, August.
  14. 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.
  15. Christophe Faugere & Julian Van Erlach, 2004. "The Price of Gold: A Global Required Yield Theory," Finance 0403003, EconWPA.

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