01 June 2013

Paul Krugman: When Economic Prudence Is Seen As Folly

Nicholas Crafts, an economics professor at the University of Warwick, wrote a really interesting article on the Vox blog recently about Britain's economic policy in the 1930s. The gist is that monetary policy drove recovery through the expectations channel; the Bank of England managed to credibly promise to be irresponsible — that is, to generate inflation.

But how did it do that? Mr. Crafts argues that this was possible for two reasons: the bank was not independent, but just an arm of the Treasury, and the Treasury had a known need to generate some inflation to bring down high debt levels.

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