Monetary Policy and Expectations: Market-Control Techniques and the Bank of England, 1925–1931

The Bank of England depleted its open-market portfolio by secretly sterilizing large gold inflows. Thereafter interest rates were influenced by manipulating reported gold flows, Expectations manipulation as a monetary policy channel is modeled and estimated. A gold flow falsification was over two-thirds as effective as an open-market operation. These results contradict accepted new classical models and suggest that credibility benefits from new classical policy are small, despite current popularity among central bankers. The episode supports Peter Temin's view of interwar central bankers as nonstabilizers and enforcers of a dysfunctional classical orthodoxy.