THE EFFECTIVENESS OF CHANGES IN INTEREST RATES
| Date | 01 November 1957 |
| DOI | http://doi.org/10.1111/j.1467-9485.1957.tb00231.x |
| Published date | 01 November 1957 |
| Author | J. R. Parkinson |
SCOTTISH
JOURNAL
OF
POLITICAL
ECONOMY
OCTOBER
1957
THE EFFECTIVENESS OF CHANGES IN
INTEREST RATES
RECENT
writings have again thrown into relief how little is known
of the likely quantitative effects of monetary measures designed
to
reduced demand. When an increase in interest rates was regarded
as the main weapon for countering inflationary tendencies it could be
argued that a quantitative assessment of the effects of raising interest
rates was not an essential requirement for the formulation of policy.
So
long as it could be postulated that a progressive increase in interest
rates would lead to a speedy and progressive reduction in demand and
there was no reluctance to use the interest rate weapon for fear
of
undesirable side effects, the level of interest rates required could
be
determined by increasing them until demand was brought under
control. But in the post-war world the interest rate weapon has been
assigned only a moderate role in regulating demand and has probably
been considered of only secondary importance in the formulation
of
monetary policy. In the operation of the most recent credit squeeze
it has not generally been argued that since an increase in interest
rates was proving insufficient to reduce demand as much as was
desired, rates of interest should be increased further but rather that
other measures of a monetary nature should be taken or supplemented
in order to intensify the squeeze. Thus the hope that the initial increases
in bank rate would reduce bank advances and deposits rapidly gave
place to increased reliance on the rationing of credit by the banks
and other measures of a more direct nature. Dissatisfaction with the
results of these measures in turn gave
rise
to suggestions that measures
should be taken to reduce the liquidity of the banks in order to give
them a compelling reason to reduce their advances.
The new methods of monetary control that have been advocated
reveal a marked shift in opinion as to the basis on which
a
credit
1
165
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