Price level and interest rate: Is the gibson paradox relevant for the Turkish economy?

Abstract

The positive relationship between the price level and the long-term interest rate, which is known as the Gibson paradox, is one of the much-debated empirical puzzles in monetary economics. The main objective of this study is to examine the validity of the Gibson paradox for the Turkish economy during the inflation targeting period. To this end, we tested the relationship between consumer price index, nominal interest rate measured by the yield to maturity of bond and one year forward deposit interest rate for the period of 2002:I-2017:IV by employing Johansen Co-integration analysis. Our results provide empirical support for the Gibson paradox. Also, we identify that the course of the long-term relationship between price level and interest rate is from nominal interest rate to the price level.