Gibson's Paradox and the Gold Standard
This paper contributes a new element to the explanations of the Gibson paradox, the puzzling correlation between interest rates and the price level seen during the gold-standard peri od. A shock that raises the underlying real rate of return in the eco nomy reduces the equilibrium relative price of gold and, with the nom inal price of gold pegged by the authorities, must raise the price le vel. The mechanism involves the allocation of gold between monetary a nd nonmonetary uses. The authors' explanation helps to resolve some i mportant anomalies in previous work and is supported by empirical evi dence along a number of dimensions. Copyright 1988 by University of Chicago Press.
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