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Gibson's Paradox II

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  • Greg Hannsgen

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.

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  • Greg Hannsgen, 2006. "Gibson's Paradox II," Economics Working Paper Archive wp_448, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_448
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    1. 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.
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    3. Pierangelo Garegnani, 2024. "Notes on Consumption, Investment and Effective Demand: II," Springer Studies in the History of Economic Thought, in: Roberto Ciccone (ed.), Capital Theory, the Surplus Approach, and Effective Demand, pages 411-434, Springer.
    4. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
    5. Amitava Krishna Dutt, 1990. "Interest Rate Policy in LDCs: A Post Keynesian View," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 13(2), pages 210-232, December.
    6. Marc Lavoie, 1992. "Foundations of Post-Keynesian Economic Analysis," Books, Edward Elgar Publishing, number 275.
    7. Chiarella,Carl & Flaschel,Peter, 2011. "The Dynamics of Keynesian Monetary Growth," Cambridge Books, Cambridge University Press, number 9780521180184, November.
    8. Greg Hannsgen, 2005. "Minsky's acceleration channel and the role of money," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 27(3), pages 471-489.
    9. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
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    Cited by:

    1. Eckhard Hein, 2009. "A (Post-) Keynesian perspective on "financialisation"," IMK Studies 01-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Eckhard Hein, 2012. "The Macroeconomics of Finance-Dominated Capitalism – and its Crisis," Books, Edward Elgar Publishing, number 14931.

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