Gibson's Paradox
Categories: Metrics, Financial Theory, Econ
Alfred Herbert Gibson (ignore his brother, Hoot, who later went on to partner with Blowfish) noticed something one day. He noticed that interest rates correlated with wholesale price levels. "Huh," he thought, since the reigning idea at the time was that inflation was correlated with interest rates.
Just who is the tango partner of interest rates then?
The evidence for the wholesale price level and interest rate correlation is there (like, over 200 years of it). Yet, economists don’t have an explanation for it. Keep in mind: this was before the central bank was artificially controlling interest rates...it was a time when interest rates were set naturally in the market.
If any macroeconomist ever figures out Gibson’s Paradox, he’ll be the Einstein of macroeconomics for sure.