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

  • Greg Hannsgen

    (Levy Economics Institute)

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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File URL: http://128.118.178.162/eps/mac/papers/0407/0407029.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0407029.

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Length: 17 pages
Date of creation: 26 Jul 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0407029
Note: Type of Document - pdf; pages: 17
Contact details of provider: Web page: http://128.118.178.162

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  1. Greg Hannsgen, 2003. "Minsky's Acceleration Channel and the Role of Money," Macroeconomics 0308003, EconWPA.
  2. Leamer, Edward E., 1985. "Vector autoregressions for causal inference?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 255-304, January.
  3. repec:cup:cbooks:9780521551861 is not listed on IDEAS
  4. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
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