Gibson's Paradox II

Greg Hannsgen

Economics Working Paper Archive from Levy Economics Institute

Abstract: 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.

Date: 2006-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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