The Gibson paradox: Evidence from China

•The Gibson paradox is a statistical artifact of commodity money systems.•China operated under a silver-cored metallic standard during the period 1873-1924.•Recursive OLS estimates show a Gibson paradox in China during 1873-1883.

Recent literature has advanced the view that the Gibson paradox, or the positive correlation of the price level with nominal interest rates, is nearly always a gold standard phenomenon. We argue that the Gibson correlation is more accurately classified as a statistical artifact of commodity money systems, with the gold standard merely representing one such system. Using new evidence from Chinese monetary history, this article gives evidence that the Gibson paradox appeared during China's silver-cored metallic standard era. Estimates obtained from recursive ordinary least squares specifications and vector auto-regressions performed, using the Shanghai Yinchai Rate and the Chinese Wholesale Price Index, confirm a Gibson correlation for China during the period 1873-1924.