Working Paper No. 448 | May 2006

Gibson’s Paradox II

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.

Publication Highlight

Working Paper No. 936
Fiscal Reform to Benefit State and Local Governments
The Modern Money Theory Approach
Author(s): L. Randall Wray
September 2019

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