A Brief History Of The Bank Of England’s Endogenous Money Policies: An Ode To Roy Harrod

What does this mean? Well, basically that the central bank is under an implicit obligation to stabilise the market for government debt. If the government borrows and this puts upward pressure on interest rates, this does not lead to ‘crowding out’, as the textbooks say. Rather it leads to the central bank stepping in to put a ceiling on interest rates through ‘back door’ lending.

This also means that government borrowing and spending can trump any attempt by the central bank to control the level of economic activity. If the central bank tries to squeeze interest rates to curtail economic activity but the government insists on running deficits, the central bank will be under the obligation to undo their tight monetary policies by effectively providing the funds to the government.

Anyway, Harrod’s book is a fascinating read and, although long out of print, is far better than the textbooks used in monetary economics courses today. After picking it up I am convinced that Harrod should be recognised as one of the eminent monetary economists of the post-war era.

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