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Investigating the Validity of Gibson Paradox for Developed and Developing Countries

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The existence of the relationship between interest rate and inflation and the direction of the relationship have been the subject of debate in many studies. Because of the fact that, some researchers believe that interest rate is source of cost, which causing price inflation by creating price pressures on goods and services. On the other hand, there are many studies suggesting that inflation causes interest rate increases. This study is to test validity of the Gibson paradox which argues that there is a positive relationship between the interest rates and the inflation rate in terms of developed and developing countries. In the study, Dumitrescu and Hurlin (2012), which considers the stationarity levels and cross-sectional dependence of the series, was used to for panel causality test for the period 1992-2013 and 2000-2013. According to the findings, significant relationships were found between interest rate and inflation rate in developed and developing countries. Moreover, analysis for all countries (develop and developing), there is a unidirectional relationship running from inflation rate to interest rate which is similar to the findings of Fisher (1930) and Shiller and Siegel (1977).

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Interest Rate , General Price Level , Gibson Paradox , Dumitrescu and Hurlin Causality Analysis.

Journal Of Economics an‎d Administrative Sciences

222