Gibson Paradox: Panel Data Analysis on ASEAN-T Countries

Abstract

The existence of a long-term positive relationship between the nominal interest rate and the general price level is called the Gibson paradox in the economics literature. In other words, according to this paradox, high prices are the result of high interest rates. Studies on this paradox in the literature gained momentum after the work of Gibson (1923). The main purpose of this study is to test whether Gibson paradox is valid for ASEAN-T countries with quarterly data of 1993:Q1-2019:Q4. In this context, short and long term interest rates and consumer price index variables were used in the study. In the study, in which panel data analysis was carried out, it was first analyzed whether there was a cross-section dependency. Because of the cross-section dependency in the series, the CADF unit root test, one of the second generation panel unit root tests, was used. Panel ARDL (Autoregressive Distributed Lag) bounds test was carried out due to the different stationarity levels of the series. According to the panel ARDL bounds test findings, there is a positive relationship between the long-term interest rate and the consumer price index in both the short and long run. Therefore, the Gibson paradox is valid in the ASEAN-T countries in the examined period.