On the Gibson Paradox

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