Annual Maxwell Fry Global Finance Lecture

The 2020 lecture was presented on 14 October via Zoom to an international audience. Professor Richard G Anderson spoke on the topic ‘Central Banking in Interesting Times and the Demand for Base Money’. Anderson’s experience includes a range of activities in central banking and academia, having served as an economist with the Board of Governors of the Federal Reserve System and on the economics faculties at Virginia Tech, the University of Michigan, Ohio State University, and Michigan State University.1

Anderson argued that central bank policymakers seem always to live in interesting times: it’s one macroeconomic shock after another. The past two decades, for example, saw the tech boom and meltdown of the late 1990s, the stagnation of the early 2000s, the global financial crisis of 2007-2008, and the novel coronavirus/covid-19 pandemic of 2020. He cited the 1950s dean of British banking scholars, Richard Sayers, that ]the very essence of central banking [is] that it should be fluid and should adapt its way to the needs of the time’.

Maxwell Fry2 emphasized that fiscal and monetary policy decisions are not independent, as sometimes assumed in textbooks, but rather are connected via the ‘government budget constraint’. In developing countries, he argued the connection all too often was revealed in large budget deficits financed via the central bank. Anderson expanded on Fry’s insights by discussing the more recent ‘fiscal theory of the price level’ (FTPL). The intent of this theory is not to assert that inflation is determined by fiscal policy but, rather, to emphasize Fry’s point that inflation and the effect of government actions on the economy are jointly determined via the interaction of fiscal and monetary policy. In particular, the FTPL, in a robust class of models, suggests that a monetary policy action will have little or no effect on economic activity if a constraint is imposed that the government's fiscal position must remain unchanged, and a fiscal policy action will have little of no effect if a constraint is imposed that the central bank’s balance sheet be unaffected.

Fry, in turn, argued that a sustainable long-run macroeconomic equilibrium, recognizing the interaction of fiscal and monetary policy might be characterized by (1) a stable rate of inflation, say , and (2) a constant ratio of central government debt to GDP, say. Anderson discussed the two-differential-equation model published in 2002 by Fry and the late Peter Sinclair, who emphasized the instability of many desirable equilibria.

Finally, Anderson reviewed implications for inflation and taxes of substantial increases in central government debt — UK public sector debt, for example, has quadrupled since 2008. Further, much debt issued today by the US and UK is ‘real’ debt, that is, either short-term or indexed for inflation, and hence cannot be ‘inflated’ away. The FTPL argues that increased debt will contribute to higher inflation if investors come to believe that it will not be redeemed in the future via positive primary budget surpluses, that is, revenue minus non-interest expenditures greater than zero. Discharging real debt requires real resources (greater tax revenue). If significant increases in inflation are to be avoided, higher future taxes are a little-recognized corollary of government response to the pandemic.

We all recognize that in some respects webinars are an imperfect substitute for face-to-face meetings. Nonetheless, participants enjoyed the lecture. Further, internet broadcasting permits participation by scholars who might not otherwise attend.

The Fry lecture was recorded and is available through links on the MMF website (www.mmf.ac.uk). The slide deck is available on request and at the speaker’s website.


1. Richard Anderson is currently visiting research professor at the University of Missouri – Kansas City, and a research fellow at the Hammond Institute, School of Business, Lindenwood University, Saint Charles, Missouri.

2. Max Fry, 1944-2000 was Tokai Bank Professor of International Finance at the University of Birmingham and Director of the Centre for Central Banking Studies at the Bank of England when illness forced his early retirement in 1999.