Gibson's Paradox - Explained
What is Gibson's Paradox?
Written by J. Mance Gordon
Updated at April 23rd, 2024
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
What is Gibson's Paradox?
Gibson's Paradox is an economic observation that posits that a positive correlation exists between the general price levels and nominal interest rates. This correlation has been observed over a long period of time. The Gibsons Paradox is attributed to a British economist, Alfred Herbert Gibson who observed the correlation between interest rates and wholesale price levels in his article written in 1923. However, the correlation between the nominal interest rate and the price level was first observed in 1844 by Thomas Tooke.
How is Gibson's Paradox Used?
Although Alfred Herbert Gibson was the first to observe the paradox, it was named by J.M. Keynes in his research titled; "A Treatise on Money." Keynes was one of the first economists to accept Gibsons paradox while other economists opposed it. As at the time the paradox was observed and popularized, it was in conflict with the opinion held by economists at that period. Economists at the period believed that there is a correlation between interest rates and rate of inflation while Gibsons paradox observes that there is a correlation between interest rates and price levels. Gibsons paradox resulted from years of observation backed with empirical evidence that shows that interest rates are correlated with the wholesale price level, thereby dispelling the widely held notion by other economists. Gibsons paradox resulted from years of observation backed with empirical evidence that shows that interest rates are correlated with the wholesale price level, thereby dispelling the widely held notion by other economists.
The Relevance of Gibson's Paradox Today
Gibsons observation of the correlation between interest rates and price levels was tagged a paradox because there was a precise explanation for the correlation. In modern economics, the relevance of Gibsons paradox has been greatly challenged given that the basis for the correlation earlier observed by Gibson no longer exists. The gold standard was also one of the reasons the relevance of Gibsons paradox was challenged. Also, the relationship or correlation between price levels and interest rates have been delinked, thereby making the paradox irrelevant. In modern economics, the central banks now manage inflation using interest rates based on the belief that they are not correlated. The use of monetary policies by Central banks has suppressed the relevance of Gibson's paradox.
Related Topics
- Legal Tender
- Numismatics
- Gresham's Law
- Barter
- Double Coincidence of Wants
- Parity
- Functions of Money
- Medium of Exchange
- Unit of Account
- Store of Value
- Time Value of Money
- Standard of Deferred Payment
- Liquidity Preference Theory
- National Savings and Investment Identity
- Circular Flow of Money
- Commodity Money
- Gold Exchange Standard
- Bretton Woods System
- Fiat Money
- Money Supply
- M1 and M2 Money Supply
- Monetary Base
- Savings, Demand, and Time Deposits
- Banks
- How Do Banks Create Money?
- Financial Intermediary
- Bank Balance Sheet
- Money Multiplier Formula
- Velocity of Money
- Multiplier Effect
- Quantity Equation of Money
- McCallum Rule
- Neutrality of Money
- Real Bills Theory
- Banking System?
- Central Bank
- Federal Reserve System
- Federal Open Market Committee (FOMC)
- Fed Balance Sheet
- Term Auction Facility
- Taylor Rule
- How is the Federal Reserve Bank Organized?
- What is Bank Regulation?
- CAMELS Rating
- FDIC
- CFPB
- Bank Supervision
- Bank Runs
- What is Deposit Insurance?
- Federal Deposit Insurance Corporation
- Lender of Last Resort
- Central Banks Carry Out Monetary Policy
- Open Market Operations
- Bank Reserve
- Discount Rate
- Federal Funds Rate
- Monetary Policy
- Contractionary and Expansionary Monetary Policy
- Loose vs Tight Monetary Policy
- Easy Monetary Policy
- Accommodative Monetary Policy
- Dove & Hawk (Monetary Policy) - Explained
- Tight Monetary Policy - Explained
- Stabilization Policy
- Pushing on a String
- The Effect of Monetary Policy on Interest Rates
- Federal Funds Rate
- Gibson Paradox
- Vasicek Interest Rate Model
- Equation of Exchange (Economics)
- The Effect of Monetary Policy on Aggregate Demand
- Quantitative Easing
- Reserve Currency
- What are Excess Reserves?
- Unpredictable Movements of Velocity
- Central Banks - Unemployment and Inflation
- Inflation Targeting
- Fisher Effect
- Asset Bubbles and Leverage Cycles
- Countercyclical
- Money Capital Market
- Quantity Theory of Money
- Aggregate Expenditure Model
- IS-LM Model
- European Capital Market Institute