Gibson's Paradox
Posted: Thu Aug 28, 2014 6:21 pm
Long time lurker here. I've read the epic PP posts over on the BH forum in their entirety & the PP books, both old & new.
I'm hoping somebody with much better econ chops than I can help with Gibson's Paradox.
From what I understand, Gibson's Paradox describes the counterintuitive finding that interest rates vary with price levels, not with inflation. Barsky & Summers (1985) explain that this is true only under a gold standard. Said another way, price levels vary inversely with real gold prices. If so, real gold prices vary inversely with interest rates.
So is it technically correct to say that nominal gold prices vary inversely with real rates? If so, then it should not have been any surprise to see gold increase when real rates started to go negative in the early 2000's?
Also, since real rates were occasionally negative throughout the bull market following the Great Depression until the late 50's, would gold have done well, or would it have performed similarly to 1982-1999?
I'm hoping somebody with much better econ chops than I can help with Gibson's Paradox.
From what I understand, Gibson's Paradox describes the counterintuitive finding that interest rates vary with price levels, not with inflation. Barsky & Summers (1985) explain that this is true only under a gold standard. Said another way, price levels vary inversely with real gold prices. If so, real gold prices vary inversely with interest rates.
So is it technically correct to say that nominal gold prices vary inversely with real rates? If so, then it should not have been any surprise to see gold increase when real rates started to go negative in the early 2000's?
Also, since real rates were occasionally negative throughout the bull market following the Great Depression until the late 50's, would gold have done well, or would it have performed similarly to 1982-1999?