DEFINITION:
Coined after the financial essayist Walter Bagehot,Bagehot Dictum states that in times of financial crisis, the central banks should lend early and ‘without limits’ to solvent firms at a ‘higher interest rate’ with ‘good collateral’.
CONTEXT:
The economic havoc created by Covid-19 in the world is increasingly putting more pressure on the global central banks to adopt uncoventional policies to combat the financial crisis. Specifically, lending only to the solvent firms against the collateral and charging a penalty rate not only promotes the efficient allocation of resources but also limits the moral hazard arising out distortionary market practices. The Bagehot’s Dictum, in principle, certainly serve the central banks to limit the adverse effects on economic activities and promote employment.
PAYCHECK PROTECTION PROGRAM:
The Paycheck Protection Program offers a modern version of Bagehot’s Dictum. Under, the CARES Act(2020) passed by the US Congress, Paycheck Protection Program for Small Business Administration intends to provide upto eight weeks of payroll and other costs for the businesses to remain viable.
CONCLUSION:
Even after being in existence for nearly 150 years, the relevance of Bagehot’s Dictum couldn’t have been more pronounced. It continues to guide the modern central banking to this day and more so under exceptional circumstances.