Abstract
Knut Wicksell's theory of price increase depends on a positive two-rate-interest-differential between the natural (i N ) and the loan rate (i L ). It is shown how Wicksell uses this theory to justify the positive relation over time between prices and the nominal interest rate now called Gibson's Paradox. Bothi N andi L must be stated in ‘nominal’ terms and an independent increase ini N sets off the increase in P.i L remains constant for a time, while the nominal demand for credit increases.i L eventually increases after a substantial lag with respect to the increase in P. The rate of inflation rather than the price level is also brought in as a potential cause ofi L rising.
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