Money, Banks and Finance in Economic Thought

When Threadneedle Street meets Lombard Street: A view from central bankers’ speeches

Sandrine LELOUP, IEP de Rennes
Emmanuel CARRE, Université Bretagne Sud

This paper investigates the apprehension in central bankers’ communication of W. Bagehot’s theory of the lender of last resort in his book Lombard Street (1873). The main focus is on the so-called “Bagehot’s rules” of the lender of last resort, mentioned by central bankers from the G7 countries. To this end, we study central bankers’ speeches mentioning Bagehot, for the period 1999-2017. This leads to the construction of a database of 139 speeches. We rely on the theoretical debate rules versus discretion (Arnon 2011), and on the standard approach of central bankers’ “types”, which opposed, “conservative” versus “liberal” central banker (Cukierman and Lippi 1999; Adolph, 2013). From a methodological perspective, the article rests upon the central bank communication literature (Blinder et al., 2008), and the Journal of Economic Literature classification is also applied (Cherrier 2017; Kosnik 2017). One of our results is that reference to Bagehot among central bankers, far from being constant, is increasing during the crisis, mainly in relation with the lender of last resort, with the so-called Bagehot’s rules in particular. But the interpretation of this renewal of Bagehot’s rules depends on the central bankers. We therefore identify two main types of receptions of Bagehot’s rules. The “liberal” interpretation emphasizes on the discretionary aspects of Bagehot’s theory of the lender of last resort. At the contrary, the “conservative” view of Bagehot insists on the rule-based approach of Bagehot. We show that the two interpretations differ because they have different theoretical foundations. The “liberal” interpretation, à la Bernanke has some New Keynesian background, and is also influenced by the monetary history of the Great Depression presented by Friedman and Schwartz (1963). It relies on the ideas developed in this book in order to recommend to lend freely, to avoid systemic risk. The second interpretation, à la Lacker, is rather based on the New Classical case for rules (Kydland and Prescott 1977). Accordingly, Friedman and Schwartz are interpreted differently: in terms of risk of deflation, not necessarily of systemic risk, so that a generalized injection of liquidity is no more an undisputable first best policy. This has led us to argue that both interpretations operate during the crisis a form of instrumentalization of Bagehot in order to justify, or oppose, to the modern version of the lender of the last resort with unconventional monetary policies. We conclude that during the financial crisis, what was ultimately at stake through the references to Bagehot by central bankers, was a paradigm shift in central banking, and more generally in macroeconomics. By showing that the mentions of Bagehot are mainly related to some instrumentalization in crisis times, we conclude that the back to Bagehot can hardly be taken as an evidence that all possible lessons about financial crisis have been drawn from his still fertile contribution.

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Keywords: Bagehot, lender of last resort, central bank communication, rules versus discretion

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