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Gibson's Paradox II

Listed author(s):
  • Greg Hannsgen

The Gibson paradox, long observed by economists and named by John Maynard Keynes (1936), is a positive relationship between the interest rate and the price level. This paper explains the relationship by means of interest-rate, cost-push inflation. In the model, spending is driven in part by changes in the rate of interest, and the central bank sets the interest rate using a policy rule based on the levels of output and inflation. The 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.

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File URL: http://www.levyinstitute.org/pubs/wp_448.pdf
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Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_448.

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Date of creation: May 2006
Handle: RePEc:lev:wrkpap:wp_448
Contact details of provider: Web page: http://www.levyinstitute.org

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  1. Marvin J. Barth III & Valerie A. Ramey, 2002. "The Cost Channel of Monetary Transmission," NBER Chapters,in: NBER Macroeconomics Annual 2001, Volume 16, pages 199-256 National Bureau of Economic Research, Inc.
  2. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, March.
  3. Greg Hannsgen, 2005. "Minsky's acceleration channel and the role of money," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 27(3), pages 471-489, April.
  4. Benhabib, Jess & Miyao, Takahiro, 1981. "Some New Results on the Dynamics of the Generalized Tobin Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 589-596, October.
  5. Marc Lavoie, 1992. "Foundations of Post-Keynesian Economic Analysis," Books, Edward Elgar Publishing, number 275.
  6. Garegnani, Pierangelo, 1979. "Notes on Consumption, Investment and Effective Demand: II," Cambridge Journal of Economics, Oxford University Press, vol. 3(1), pages 63-82, March.
  7. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
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