Abstract
This paper contributes a new element to the explanation of the Gibson paradox, the puzzling correlation between interest rates and the price level seen during the gold standard period. A shock that raises the underlying real rate of return in the economy reduces the equilibrium relative price of gold and, with the nominal price of gold pegged by the authorities, must raise the price level. The mechanism involves the allocation of gold between monetary and nonmonetary uses. Our explanation helps to resolve some important anomalies in previous work and is supported by empirical evidence along a number of dimensions.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have