The Monetary Reform Debate

Abstract

To assess the deficiencies inherent within both the control system and the conduct of policy itself it is necessary to distinguish between short- and long-run control of the money supply. The major factor militating against effective long-run control was (and remains) the interest rate insensitivity of bank credit demand from the private sector (Moore and Threadgold, 1980) which proved greater than anticipated (Goodhart and Crockett, 1970; Artis and Lewis, 1981, pp. 18–19). A rise in MLR would, by directly influencing base rates, eventually induce the banks to raise lending rates which, in theory, would reduce the private sector’s willingness to incur bank debt. In practice, both halves of the ‘transmission mechanism’ occasionally proved faulty, for banks’ lending rates sometimes proved ‘sticky’ when, for example, a squeeze in margins was tolerated in order to gain market share or to retain customer loyalty, and when the corporate sector’s demand for bank loans proved unusually resilient to higher loan charges during cash flow crises.