The Gibson Paradox: An Empirical Examination for the Bangladesh Economy

Abstract

The subject matter of this article is to pursue the existence of positive dependency between inflation and interest rate, known as  “Gibson Paradox” which is in conflict to our traditional theory where a negative association ship between interest rate and inflation  exists. Suitable ARDL technique is used to check the dynamics among variables with a view to confirming long run relationship  between variables. Unit root test with various diagnostic tests empirically reveals Gibson Paradox is not valid for Bangladesh for short  run and long-run both but they provides negative relationship with long term dependency by supporting the traditional theory. ECM  shows about 42.26% is corrected each year form short-divergence to long-term equilibrium. It will contribute to the existing literature  by using modern econometric techniques between inflation rate and interest rate during period 1986-2019.