A Varma Test on the Gibson Paradox

Chung Chen · Chi‐Wen Jevons Lee

32 citations0/0 files storedThe Review of Economics and Statistics

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Monetary Policy and Economic Impact Market Dynamics and Volatility Economic theories and models

Abstract

We applied the VARMA test to examine the dynamic relation between prices and interest rates. The dynamic relation, which is important to characterize the nature of the Gibson paradox, provides economists new insight in discriminating against competing theories. In light of our empirical findings, all theories in the literature lose their persuasiveness. We found some evidence of unidirectional relation from prices to interest rates, but we found no evidence of unidirectional relation from interest rates to prices. Hence, the business cycle explanations advanced by Wicksell (1907), Keynes (1930), Lee and Petruzzi (1986), and Barsky and Summers (1988) are especially in jeopardy. A century and a half after its birth, this paradox is more puzzling than ever. Copyright 1990 by MIT Press.

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References

1969Investigating Causal Relations by Econometric Models and Cross-spectral Methods 1972MONEY, INCOME, AND CAUSALITY 1971A Treatise on Money 1974Time series analysis and simultaneous equation econometric models 1983Comparing alternative tests of causality in temporal systems 1977Causality in temporal systems 1979Autoregressive Modeling of Canadian Money and Income Data 1977Relationships—and the Lack Thereof—Between Economic Time Series, with Special Reference to Money and Interest Rates

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