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Gibson s Paradox and the Natural Rate of Interest

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  • Luca Benati
  • Pierpaolo Benigno

Abstract

We argue that Gibson s paradox has nothing to do with the Gold Standard per se, and it rather originates from low-frequency variation in the natural rate of interest under certain types of monetary regimes that make inflation I(0) and (approximately) zero-mean. Although the Gold Standard is the only historical example of such a regime, Gibson s paradox is a feature of a potentially wide array of monetary arrangements. In fact, once removing the deterministic component of the drift in the price level, the paradox can be recovered from the data generated under inflation-targeting regimes. By the same token, the paradox could arise under a regime targeting the level of the money stock, whereas it would not appear under arrangements targeting the levels of either prices or nominal GDP. We show that the mechanism underlying Gibson s paradox hinges on the interaction between the Fisher equation and an asset pricing condition determining the current value of money. Our interpretation points towards inefficiencies in the actual implementation of monetary policies.

Suggested Citation

  • Luca Benati & Pierpaolo Benigno, 2023. "Gibson s Paradox and the Natural Rate of Interest," Diskussionsschriften dp2303, Universitaet Bern, Departement Volkswirtschaft.
  • Handle: RePEc:ube:dpvwib:dp2303
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    1. Nathan Balke & Robert J. Gordon, 1986. "Appendix B: Historical Data," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 781-850, National Bureau of Economic Research, Inc.
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    5. Arthur J. Rolnick & Warren E. Weber, 1998. "Money, inflation, and output under fiat and commodity standards," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 22(Spr), pages 11-17.
    6. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 821-852.
    7. Barsky, Robert B & Summers, Lawrence H, 1988. "Gibson's Paradox and the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 528-550, June.
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    Cited by:

    1. Pierpaolo Benigno, 2023. "The International Supply of Reserve Currency," Diskussionsschriften dp2313, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    Keywords

    Gibson s Paradox; monetary regimes; natural rate of interest; Fisher equation; Gold Standard; inflation targeting; optimal monetary policy;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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