GIBSON PARADOX REVISITED – LIQUIDITY CHAIN EFFECT

Marinko Škare,Lorena Mošnja-Škare

doi:10.3846/16111699.2014.984753

Marinko Škare, Lorena Mošnja-Škare

Open Access

https://doi.org/10.3846/16111699.2014.984753

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Abstract

Gibson paradox remains a puzzle in the discipline of economics. Previous studies attempted to resolve the paradox looking separately at the gold standard, changing monetary regimes, inflation expectations, risk and uncertainty. Our study shows Gibson paradox holds for the Netherlands 1800-2012 with real long interest rates and prices diverging after 2008. This paper offers empirical evidence (nonlinear cointegration) on the integrity of the Gibson paradox. Single factor cannot explain the paradox itself (because of its nonlinear nature) as previous studies attempted. Empirical link between long interest rates and prices is caused by complex interaction between purchasing power, liquidity, gold prices, market turnover, stocks accumulation, productivity, short-term interest rates. This approach analysis the purchasing power and price relation, resulting in firms’ turnover and liquidity shifts, leading to short-term borrowings changes and pressures on interest rates in the short as well as in long-term. Actually, the model enables us to track the series of price change effects finally resulting in interest rates shifts, via a set of microeconomic and financial laws, which taken at the aggregate level could offer the Gibson paradox explanation. Further studies must explore nonlinear nature of the paradox in order to explain it. Study results have important implications for policy makers and firm governance policy.

Highlights

Gibson (1923) tried to explain the interest rates and prices relationship by looking at the “sympathetic” movement between the course of commodity prices and the course of the yield on British Consols 1820–1922
Our study shows Gibson paradox holds for the Netherlands 1800-2012 with real long interest rates and prices diverging after 2008
Following Corbae and Ouliaris (1989) positive correlation resulting from a properly specified cointegrated model we find between long-term interest rates (LR) and CPI for the Netherlands prove the existence of an economic relationship in the data, i.e. Gibson Paradox existence

Summary

Introduction

Gibson (1923) tried to explain the interest rates and prices relationship by looking at the “sympathetic” movement between the course of commodity prices and the course of the yield on British Consols 1820–1922 (long term interest rate or LR later in the text). A rise in the cost of living is followed by a rise in the yield of high-class fixed interest-bearing stocks – Gibson Law. Keynes (1930) was puzzled by the relationship between long-term interest rates and level of wholesale prices Gibson uncovered. Believing in long-term interest rates and general price level change (inflation) link, Keynes forged the term Gibson paradox. Research results from previous studies clearly addressed the Gibson paradox from the standpoint of trying to identify a one principal explanatory factor behind the phenomenon, ignoring possible nonlinear behaviour in interest rates or prices. Such a complex phenomenon cannot be explained on such research ground.

On the Gibson paradox

Data sources and time series properties

Liquidity chain effect – Gibson paradox revisited

Conclusions