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Gibson’s Paradox, Monetary Policy, and the Emergence of Cycles

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Author Info
Greg Hannsgen (Levy Economics Institute)

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Abstract

Many empirical studies have found that interest rate increases have a positive effect on the price level. This paper pursues an obvious, but neglected explanation: interest payments are a cost of production that is at least in part passed on to customers. A model shows that the cost- push effect of inflation, long known as Gibson’s paradox, intensifies destabilizing forces and can be involved in the generation of cycles. An empirical investigation finds that the positive association of interest rates with inflation or the log of the price level is present in data from the 1950s to present.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0407029.

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Length: 17 pages
Date of creation: 26 Jul 2004
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Handle: RePEc:wpa:wuwpma:0407029

Note: Type of Document - pdf; pages: 17
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Web page: http://129.3.20.41

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Related research
Keywords: Gibson’s Paradox; Inflation; Monetary Policy Rules; Nonlinear Dynamics;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E11 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Marxian; Sraffian; Institutional; Evolutionary
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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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. Leamer, Edward E., 1985. "Vector autoregressions for causal inference?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 255-304, January. [Downloadable!] (restricted)
  2. Greg Hannsgen, 2003. "Minsky's Acceleration Channel and the Role of Money," Macroeconomics 0308003, EconWPA. [Downloadable!]
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  3. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June. [Downloadable!] (restricted)
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Cited by:
(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. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited—To Ditch or to Build on It?," Method and Hist of Econ Thought 0508003, EconWPA. [Downloadable!]
  2. Joerg Bibow, 2005. "Liquidity Preference Theory Revisited: To Ditch or to Build on It?," Economics Working Paper Archive wp_427, Levy Economics Institute, The. [Downloadable!]
  3. Greg Hannsgen, 2004. "The Transmission Mechanism of Monetary Policy: A Critical Review," Macroeconomics 0411004, EconWPA. [Downloadable!]
    Other versions:
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