SOLVING THE INTEREST RATE CONUNDRUM

« Today, we have come a long way from that naïve and cheerful notion – one still occasionally found in theoretical textbooks on monetary policy – that the central bank has money on tap which can be doled out in order to achieve the desired demand and price developments. »


You would be hard pressed to guess which central banker said this on March 4. The quote is from 1968, not 2022, by Dr Otmar Emminger, a long time servant of the Bundesbank (its president from 1977 to 1979) and the IMF. Historically, when monetary or fiscal policies are viewed as too inflationary, the « bond vigilantes » step in. And step in they did in the United Kingdom. In about three weeks after the mini budget on September 23, the bond vigilantes forced chancellor Kwarteng out of his job. The government had to abandon most of their fiscal measures and the Bank of England intervened several times in the Gilts market.


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SOLVING THE INTEREST RATE CONUNDRUM
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