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Bagehot’s Lombard Street and Macroeconomic Stabilisation
Author(s) -
O’Brien D. P.
Publication year - 2001
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/1467-9485.00207
Subject(s) - lender of last resort , economics , business cycle , interest rate , anticipation (artificial intelligence) , work (physics) , control (management) , money market , monetary economics , central bank , macroeconomics , monetary policy , engineering , computer science , mechanical engineering , management , artificial intelligence
Bagehot’s Lombard Street (1873) has been recognised as the classic statement of the role and necessity of a Lender of Last Resort in a fractional reserve system. This perception has concealed, however, the fundamental nature of the work, which developed a sophisticated model of the business cycle, as the basis for shifting the focus of monetary control from the high‐powered money base to control via the rate of interest. In the course of developing this model, Bagehot was able to show that using Bank Rate to protect the reserve in the Bank of England, in anticipation of the cycle of the market rate of interest, rather than simply following the market rate, would both enable the Bank to fulfil its role as Lender of Last Resort, and to stabilise the business cycle.