THE RELATIONSHIP BETWEEN NOMINAL INTEREST RATE AND INFLATION RATE: AN ANALYSIS ON THE VALIDITY OF THE GIBSON PARADOX

Abstract

Gibson, in contrast to the Classical economic view, revealed the existence of a positive relationship from the wholesaleprices index to the bond interest in the British economy in 1923. This relationship, which was later referred to as the \"GibsonParadox\", constituted the subject of many theoretical and empirical work. In this study, it is also investigated a validity of theGibson Paradox for Fragile Economies in the period 2000-2016. In investigating the validity of the Gibson Paradox, nominaldeposit interest rate and inflation rate were used and in investigating the relationship between the two variables, SeeminglyUnrelated Regression (SUR) Method was used. Seemingly Unrelated Regression Method has certain superiorities because ituses units within a system in estimation, takes cross sectional dependency into consideration and produces results separatelywith respect to each unit. When the results obtained are examined, a positive and meaningful relationship has been foundbetween nominal deposit interest rate and inflation rate in all Fragile Economies. As a result, Gibson Paradox is valid in allFragile Economies in the period 2000-2016.