This paper uses recent developments in the theory of nonstationary regressors to investigate empirical relationships previously taken to support the Gibson paradox, using quarterly data over the 1957:1-1994:4 period on nominal interest rates and prices for eight European Union countries--Belgium, Denmark, England, France, Germany, Ireland, Italy, and The Netherlands. Using the methodology suggested by Kydland and Prescott, it is shown that the (relevant) cyclical nominal interest rate--price level contemporaneous correlations are weak, thereby punching a hole in the Gibson paradox. Evidence is also presented, based on the integration properties of the data, that standard Gibson paradox regressions are spurious. Copyright 1999 by Blackwell Publishing Ltd.
