Question

What does the “Bagehot’s Dictum,” refer to? Please explain in the context of the effect of the current effect of the COVID-19 to the economy.

Answer 1

Answer - The Bagehot's dictum refers to the concept of the Central bank being the lender of the last resort and lend freely to the commercial banks without any limit at the high rate of interest. This lending is to be done to solvent banks and increase the liquidity in the economy.

During the phase of Covid 19 , the economy is operating in recession , there is lack of money supply and liquidity is very low. In this case the role of the central bank will be to implement this Bagehots Dictum and lend money to banks in order to increase the liquidity in economy and curb the phase of inflation.