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

Greg Hannsgen

Macroeconomics from University Library of Munich, Germany

Abstract: 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.

Keywords: Gibson’s Paradox; Inflation; Monetary Policy Rules; Nonlinear Dynamics (search for similar items in EconPapers)
JEL-codes: C22 E11 E12 E32 E52 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2004-07-26
New Economics Papers: this item is included in nep-mac and nep-mon
Note: Type of Document - pdf; pages: 17
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Gibson's Paradox, Monetary Policy, and the Emergence of Cycles (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0407029

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