Gibson's Paradox and the Gold Standard [report]

Robert Barsky, Lawrence Summers
1985 unpublished
This paper provides a new explanation for Gibson's Paradox -the observation that the price level and the nominal interest rate were positively correlated over long periods of economic history. We explain this phenomenon in terms of the fundamental workings of a gold standard. Under a gold standard, the price level is the reciprocal of the real price of gold. Because gold is a durable asset, its relative price is systematically affected by fluctuations in the real productivity of capital, which
more » ... of capital, which also determine real interest rates. Our resolution of the Gibson Paradox seems more satisfactory than previous hypotheses. It explains why the paradox applied to real as well as nominal rates of return, its coincidence with the gold standard period, and the co-movement of interest rates, prices, and the stock of monetary gold during the gold standard period. Empirical evidence using contemporary data on gold prices and real interest rates supports our theory.
doi:10.3386/w1680 fatcat:hk2fzbgvkvhllitukvtdvdkixa