Analysis of Nominal Interest Rate-General Price Level Relationship Within the Framework of Gibson Paradox

The purpose of this paper is to test Gibson paradox for the Turkish economy and to answer theoretical debate about the direction of long-term relationship. For this purpose we used consumer price index and twelve-month forward deposit interest rate for the period of 1990-2014. Bounds testing approach developed by Pesaran et al. (2001) was applied to test the paradox. The presence of Gibson paradox has been accepted and also the long-term relationship has been detected to be one-way from general price level to nominal interest rate as Fisher (1930), Shiller and Siegel (1977), Friedman and Schwartz (1982) proposed.