The statistical relationship between price levels and interest rates, known as the "Gibson paradox," is, according to Keynes, "the most established fact in monetary economics." Since Barsky and Summers (1988), the Gibson Paradox has been interpreted as a phenomenon associated primarily with the gold standard. The test of the Gibson paradox using Japanese historical data provides a good opportunity to determine whether this claim is true because the monetary system during the Meiji era went through three phases: fiat money, silver standard, and gold standard. Our empirical findings show that this phenomenon tends to hold true in Japan only during the period of fiat money (1877-85) and is not observed under the precious metal standards, contradicting the claim made by Barsky and Summers (1988). The study also examines whether the adaptive expectation hypothesis proposed by Irving Fisher (1930) holds true and reveals the mechanism that governs the behavior of interest rates.
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