Interest rate, price level, and the inflation rate: Evidence from the UK during the gold standard regimes

Abstract

This paper empirically investigates the Gibson Paradox and the Fisher Effect for the UK during different metallic and non-metallic regimes. The paper applies long-span monthly data on the long-term interest rate and the price index from 1790 to 1931. The ARDL cointegration is employed to study the long-term relationship. Significant evidence is provided for the paradox during the uninterrupted gold standard era of the UK (1821–1914). We also find evidence of the paradox during the short-term gold exchange standard era (1925–1931). Further results also confirm the Fisher Effect during the 1821–1914 period, providing some backing to its ability to explain the paradox. This is further asserted by the short-run mutual influence between the rate of interest and the inflation rate.