CAPÍTULO II. MEJORAS A LA APLICACIÓN FASTER
III.1 Entrada de datos y operatividad
Based on the discussion of the associated governability paradigm in the previous chapter, this section formulates an ideal typical model of central bank agency under the policy paradigm of inflation targeting, the key features of which have been de- scribed in the introduction. The analysis proceeds via a comparison with the only ful- ly realised previous macroeconomic policy paradigm – postwar-era ‘Keynesian’ de- mand management.37 The most visible aspect of the transition from demand management to inflation targeting was the shift of “the burden of economic manage- ment” from fiscal to monetary policy (Pixley 2004: 14). However, as illustrated in Ta- ble 1, this obvious shift was accompanied by equally significant changes in the tem- porality, centrality, materiality, and transparency of the macroeconomic agency of the state. Overall, these changes amounted to a gestaltswitch of macroeconomic agency from ‘mechanical engineering’ to ‘performative governance’.
Table 1: Two policy paradigms, two models of macroeconomic state agency
Keynesian demand
management (fiscal policy)
Inflation targeting (monetary policy)
Centrality Centralised: government Decentralised: interbank market,
households, and firms
Temporality Reactive (based on past data) Proactive (based on forecasts)
Materiality Primarily material (aggregate
spending) Primarily ideational (expectations)
Transparency Strategic secrecy Strategic transparency
Gestalt Hydraulic governance/mechanical
engineering
Performative governance
37. For an excellent discussion of ‘Keynesianism’ that places a particular emphasis on Keynesian policy rather than theory, see Clift and Tomlinson (2007: 49-52).
Centrality: Under Keynesian demand management, the government influenced the economy by increasing demand and employmentdirectly through the purchase of goods and services with borrowed money. In contrast to this centralised form of macroeconomic agency, the model of inflation targeting involves the decentralisation of macroeconomic agency. In theoretical terms, this decentralisation is a corollary of New Classical ‘microfoundations’ and rational expectations, which imply that any short term gain from fiscal stabilisation policy reduces private consumption and in- vestment because rational economic subjects discount the higher future tax burden. Any attempts by the state to manipulatequantitiesare thus neutralised. The only way for the state can have leverage over the economy is by setting incentives – i.e., prices – for economic subjects to behave in certain ways. However, central banks usu- ally have direct control only over the overnight interest rate at which banks borrow and deposit money at the central bank, and thus, indirectly, over short-term money market rates more generally. But aggregate (investment) demand (and, by implication, resource utilisation and future inflation) depend onlong-terminterest rates, which are generally determined by market forces. This disconnect between the central bank’s in- strument and its goal variable essentially shifts the locus of macroeconomic agency from the state to financial markets, non-financial firms, and households (Hall 2008: 197). This decentralisation of agency implies that the governability of the economy depends to a greater extent on the successful performation of governable economic subjects and institutions.
Temporality:The macroeconomic paradigm of ‘Keynesian’ demand management
was reactive in the sense that policy interventions were guided by past economic data. From a New Classical perspective, on the other hand, short-term stabilisation
measures are neutralised by rational actors who fully anticipate their long-term conse- quences. The notion of rational expectations thus shifts the focal point around which macroeconomic coordination can be achievedinto the future.38Moreover, at the level of concrete practices, the future-orientation of monetary policy is due to the fact that central banks only directly control the short-term interest rate in the money market, whereas the intermediate variables that monetary policy relies on in order to control aggregate economic activity and the inflation rate are long-term interest rates, the ex- change rate, and asset prices (Fracasso et al. 2003: 4). The present value of these vari- ables reflects expectations about future economic conditions, which include, crucially, the future path of the short-term interest rate set by the central bank (Woodford 2003: 16). Therefore, the impact of a change in the short-term interest rate on the future in- flation rate hinges entirely on whether expectations held by private economic actors regarding the future path of the policy rate are consistent with the inflation target.39
38. For a discussion of the ways in which financial innovation has led to an ever greater presence of the future in economic decision making, see Esposito (2011).
39. Moreover, the second reason why “monetary policy is more effective if it is guided by forecasts” (Svensson 2011: 1239) is that there is a time lag between a change in the instrument variable (the short term interest rate) and its impact on the target variables (resource utilisation and inflation).
Figure 1: The transmission mechanism of monetary policy in the euro area
Source: Adapted from ECB 2014e.
Materiality: The fundamental question for monetary theorists and policy-makers
is how central bank interventions at the short end of the yield curve translate into changes in aggregate economic activity – that is, how changes in the short-term inter- bank interest rate work their way through the economy to affect long-term interest rates, asset prices, and the exchange rate, and thereby output, employment, and ulti- mately future inflation rates. The technical term to describe the responsiveness of the economy to central bank interventions is that of the transmission mechanism of mone- tary policy. Whereas the traditional money view emphasises the impact of interest rate changes on the real rate of return, the lending view accepts the existence of market imperfections and credit rationing and investigates their effects on bank lending, bank capital, and balance sheet channels (Cecchetti 1995; Boivin et al. 2010). However,
while the money view and the lending view illuminate the material dimension of the monetary transmission mechanism, the link between short-term money market rates and yields on government bonds and long-term bank lending rates is essentially ideational. In monetary economics, the central role of expectations has led to the emergence of – in addition to the money and the lending view – an ‘expectationalist’ view, which insists on the existence of a separate expectations channel in the trans- mission mechanism of monetary policy.40As Michael Woodford – widely regarded as the most influential monetary economist of the past two decades – put it in his canoni- cal Interest and Prices, “[n]ot only do expectations about policy matter, but, at least under current conditions, very little else matters” (Woodford 2003: 15, original emphasis). This view has since become a commonplace among both monetary theo- rists and policy-makers.
Transparency:The New Classical critics of Keynesian demand management saw
intransparency as a necessary feature of any active stabilisation policy, whose effec- tiveness “rests on the inability of private agents to recognize systematic patterns in monetary and fiscal policy” (Lucas/Sargent 1979: 58). From this perspective, counter- cyclical policies, fiscal or monetary, can only work if people adhere to a false model of the economy – that is, if they do not understand the (New Classical) concepts of Ricardian equivalence or the neutrality of money. As Giddens put it, there was a pos- sibility “that Keynesianism can only be effective in circumstances in which the major- ity of the population, or certain key sets of business actors, do not know what Keyne- sianism is” (Giddens 1987: 201). Under the inflation targeting paradigm exactly the
40. Morris and Shin attribute the term ‘expectationalist’ to Charles Goodhart. They use it to refer to the “school of thought that includes not only Michael Woodford, but other leading monetary monetary economists such as Alan Blinder, Lars Svensson and Ben Bernanke” (Morris/Shin 2008: 88).
opposite holds true (Blinder et al. 2001; Geraats 2002; Blinder 2004; Walsh 2007: 143). Although the shift in monetary policy towards transparency is often explained as a straightforward result of the rational expectations view, it must be placed in the big- ger context of the financialisation of the global economy (Boyer 2000; Van Treeck 2009; Watson 2009; van der Zwan 2014). Using Hardie’s (2012: 14) definition – “the increased ability to trade risk” – financialisation can be described as a process that in- creases the share of present economic activity that is based on expectations of future financial flows (cf. Palan 2013), which in turn makes the future path of the interest rate the key variable for economic decision-making. Under these conditions, the pre- dictability of such decision-making rests, to a significant extent, on economic agents’ understanding of the (future) behaviour of the central bank. This, in short, is the rea- son why central banks have embraced the principle of what Abolafia and Hatmaker (2013: 541-543) have aptly called “strategic transparency”.
Gestalt:Prior to the rational expectations revolution, macroeconomic governance
was a matter of hydraulic governance and, at the theoretical level, a problem of opti- mal control. Governance was hydraulic, because stabilisation policy took the form of government spending that directly increased aggregate demand and thus income. At the theoretical level, this approach implied that modelling the economy and governing the economy were two different things. While this idea has been expressed most clearly in relation to pre-rational expectations monetary policy, it applies equally to pre-rational expectations fiscal policy: “A set of equations described the behavior of the private sector; the job of the central bank was to select the proper settings for its policy instruments to guide the economy along its optimal path, given the policymak- ers’ objective function” (Poole/Rasche 2000: 257). The internalisation by central
banks of the view that their own behaviour entered the calculations of market actors introduced an element of reflexivity into macroeconomic governance that meant that it could no longer be approached from an optimal control point of view: “The private sector could in principle notbe modeled without specifying the monetary policy rule, because the behavior of optimizing agents could not be predicted without modeling their expectations about monetary policy” (Poole/Rasche 2000: 257). In other words, the social process of expectation formation became an object of governance itself – monetary policy would henceforth be a form of performative governance aiming to perform the very conditions for its own effectiveness.
This section has explored the ramifications of the paradigmatic shift from Keyne- sian fiscal demand management to central bank-centric inflation targeting for the na- ture of the macroeconomic agency of the state, defined as the capacity to steer the lev- el of aggregate economic activity. While the existence of this governability was thereby assumed as given, I will, in the following, argue the case for dropping pre- cisely that assumption. For the central bank’s ability to govern is notsimply a corol- lary of its ‘independence’.41In fact, measured against the ambitiousness of the agenda of modern macroeconomic management, and compared to the relatively straightfor- ward mechanics of fiscal demand management, central banks “have less power than they claim and are credited with” (Ingham 2004: 223, note 18). Understanding why and how central banks nevertheless hold such sway over the economy requires an un- derstanding of the performative nature of monetary governance.
41. It is not wrong, of course, to say that “[t]he power of the European Central Bank (ECB) is rooted in its independence established in the Maastricht Treaty” (Howarth 2009: 73). However, this is to say something about its power as a political, rather than as an economic institution.