Goodhart’s law

In the early 1970s central banks increasingly began to adopt monetary targets as an intermediate, and potentially manageable, variable in pursuit of their final objective of controlling inflation. Naturally each country that did so, including the United Kingdom, tended to choose that particular monetary aggregate that, up to the date of choosing, appeared to have the most stable relationship with nominal incomes, and hence inflation. By 1975, however, these econometric relationships had in many cases broken down, not only for most demand-for-money or velocity relationships, but particularly so in most countries for that aggregate chosen as the monetary target. While some decline in (predic- tive) relationship might have been expected in light of the disturbances of 1973-74, for instance the oil shock, sharp rise in inflation, house/property boom/bust, sharply varying interest rates, and so on, what was remarkable was that it was in the case of the chosen targets where the breakdowns seemed most extreme. As Governor Bouey of the Bank of Canada is reputed to have said, "We did not leave the monetary targets; rather they left us."

Glass–Steagall Act

The expression "Glass-Steagall Act" is commonly used to refer to the provisions of the US Banking Act of 1933, relating to the separation between commercial banks and investment banks (see Norton, 1987).

Although they have been only partially implemented, the Glass-Steagall Act limi- tations to commercial banks' involvement in security activities had a profound and long-lasting influence on banking in the United States. With the Great Depression of the 1930s, the share of corporate securities in commercial bank security portfolios shrank considerably, and in the following decades never returned to its pre-1929 levels. The share of government securities grew correspondingly. The Glass-Steagall Act is considered to be the main determinant of this trend, even more than the Great Depression and the enormous increase in the issuance of government bonds needed to finance the Second World War - indeed, it is the only one of these three factors whose influence was not of a temporary nature (see Ramirez and DeLong, 2001, pp. 97-101).

Gibson’s paradox

The Gibson paradox is the positive correlation between the long-run rate of interest and the price level. As observed by Tooke (1838, 1844), who by this time had become the main representative of the Banking School in opposition to the Currency School in the nineteenth century in England, "[a] higher rate of interest, in consequence of the absorption by the war loans of a considerable proportion of the savings of individu- als; such higher rate of interest constituting an increased cost of production" (Tooke, 1838, p. 347).

Wicksell (1898 [1985], p. 69) emphasized the relevance of Tooke as an economist "equipped with an infinite amount of practical experience and unhampered by any very great theoretical ballast". After Tooke, only Wicksell realized the positive impact of lasting changes in the rate of interest on money and prices. His explanation, based on the marginalist theory of prices and distribution, is grounded in the variation of a non-observable natural rate of interest as a guide of money rates of interest. Obviously, the above-mentioned variation is inferred from the change in the money rate of interest, which is clearly observable.