Ben Bernanke and Bagehot's Rules: Further Explorations

Abstract In an article published in this journal, Hogan, Le, and Salter (2015) challenge Bernanke's claim, according to which the Federal Reserve's policy was consistent with Bagehot's rules of lending of last resort during the 2007–09 financial crisis. The purpose of our paper is twofold. First, we comment on the article by Hogan, Le, and Salter entitled “Ben Bernanke and Bagehot's rules,” which mainly focuses on the Federal Reserve's policy but does not fully investigate Bernanke's theory of lending of last resort. Second, we provide a more detailed exploration of Bernanke's approach to Bagehot's rules, and especially the rule of a high rate. We examine how Bernanke attempts to adapt Bagehot's rules to the modern monetary and financial system and how he addresses the theoretical arguments centered on moral hazard. We conclude that the rule of lending of last resort, as suggested by Bernanke, is plainly not in accordance with his previous analysis about financial stability policy.