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Gibson's Paradox and the Gold Standard

  • Robert B. Barsky
  • Lawrence H. Summers

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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File URL: http://www.nber.org/papers/w1680.pdf
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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: Aug 1985
Date of revision:
Publication status: published as Journal of Political Economy, Vol. 96, No. 3, pp. 528-550, (June 1988).
Handle: RePEc:nbr:nberwo:1680
Note: EFG ME
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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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. Robert B. Barsky, 1986. "The Fisher Hypothesis and the Forecastability and Persistence of Inflation," NBER Working Papers 1927, National Bureau of Economic Research, Inc.
  3. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  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.
  5. Thomas J. Sargent, 1971. "Interest rates and prices in the long run: a study of the Gibson paradox," Working Papers 75, Federal Reserve Bank of Minneapolis.
  6. 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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