DEFINITION of 'Gibson's Paradox'
An economic observation made by British economist Alfred Herbert Gibson that points to the positive correlation between interest rates and the general price level. The findings are a paradox because it is contrary to the view generally held by economists at the time, which was that interest rates were correlated to the rate of inflation.
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BREAKING DOWN 'Gibson's Paradox'
While Gibson was the first to note this paradox, J.M. Keynes' was first to give the observation a name. In his research, which he discusses in "A Treatise on Money" (1930),Â interest rates were highly correlated to wholesale prices but had little correlation to the rate of inflation. In this paradox, interest rate movements are connected to the level of prices, not the rate of change in prices.
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