Economic policy implications of the Gibson Law in the Netherlands (1800–2012)

Abstract

Gibson paradox is one of the most discussed economic phenomena in the literature. As observed by Keynes (1930), the most established empirical fact in economics remains unsolved. This paper investigates the Gibson law in the Netherlands over 1800–2012 focusing on the nature of the paradox. Establishing the presence of the paradox outside Gibson (1923) original research in the United Kingdom brings new light to understanding the paradox true nature. A non-linear analysis (logit) is used to identify the factors behind the paradox in the Netherlands. The results provide support that Gibson paradox is the most established empirical fact (non-linear and multivariate) in economics that has pronounced economic policy implications. Policy makers and central banks significantly affect short-term interest rates influencing long-term rates under the expected rise in interest rates for circulation credits. High purchasing power means better micro and macro liquidity and less demand for circulations credits directing Gibson regime-switching behaviour.