El guía de turismo como profesional de la comunicación

This chapter has investigated the communicative apparatus that governs the expecta- tion formation process of monetary insiders in the euro area. The chapter began by showing that the monetary consensus of the early 2000s tended to view this apparatus as more important for monetary governability than the financial apparatus examined in the previous chapter. The crucial question of how the recent crisis management ex- perience of the ECB has affected this balance will need to be postponed until after the discussion of this experience in chapter six, and will be taken up again in the final conclusion. Here, I shall highlight three general – and, in two cases, revisionist – im- plications of the performative analysis in this chapter for the way in which we think about the roles of ‘credibility’ and ‘knowledge’ in monetary governance.

4.8.1 The performative dimension of credibility: ‘Inflation nutters’ and pretence of single-mindedness:

The upshot of the two ‘monetarist prologues’ was that in spite of their apparent in- transparency, both the Fed’s radical Reserve Position Doctrine and the Bundesbank’s pragmatic brand of monetary targeting functioned as effective communicative appara- tuses that successfully conditioned expectation formation. On that basis, the analysis in this chapter has shown that the way in which the communicative apparatus of the Eurosystem disentangles and frames expectation formation differs less from these monetarist apparatuses than the literature on the “quiet revolution” in central banking would suggest (Blinder 2004).

To see why, it must be emphasised, first, that all three monetary policy strategies have the inflation rate as their ultimate target, and, second, that in the short run infla-

tion is governed by factors over which the central bank has no direct control (Fried- man/Kuttner 2011: 1354). The second point raises the question why central banks choose inflation as their target at all. According to the Tinbergen-Theil principle, which constitutes an important element in the theoretical foundation of inflation tar- geting, “it is possible to express the policy chosen at any time in terms of the intended outcome ... of any single magnitude that monetary policy affects: inflation, output, employment, the economy’s foreign balance, even some magnitude of no intrinsic im- portance whatsoever” (Friedman 2002: 3-4, original emphasis). Far from suggesting that inflation has no intrinsic importance, however, Friedman argues that the principal benefit of an exclusive focus on the inflation rate is that it conditions the way in which market actors form expectations:

Inflation targeting is a way of manipulating private-sector decision makers’ expect- ations about future inflation. It puts before them the central bank’s long-run object- ive of achieving inflation equal to such-and-such a rate. It removes from explicit discussion whatever objectives the central bank may hold for output, employment, or other real outcomes, over less than the long run. It likewise removes from dis- cussion the trade-off that monetary policymakers perceive between inflation and real outcomes over less than the long run.

(Friedman 2002: 16) Thus, even though this form of communication is neither very straightforward nor particularly transparent, conditioning market actors by ‘pretending’ that only inflation matters is a crucial precondition for what is generally described as the credibility of the central bank. Only “by keeping out of the discussion those considerations that would reveal that commitment to be qualified” is the central bank able to commit credibly to keeping inflation low (Friedman 2002: 16). The reason why such a com- munication strategy is not straightforward is that, as noted by Mervyn King (1997), central bankers are not, in reality, the “inflation nutters” they pretend to be. Instead, they also (or even mostly) care about real outcomes such as output and employment.

Yet by pretending that they do not, central bankers frame their communicative interac- tion with monetary insiders in a way that allows them to appear more consistent and predictable than would be possible if they gave equal consideration to the multitude of disparate or even contradictory economic trends that can be observed at any given time. The welfare-enhancing effects that accrue, according to Rogoff’s (1985: 1170) influential analysis, from “appointing as head of the central bank an agent whose dis- like for inflation relative to unemployment is known to be stronger than average”, are the result of this central banker’s ability to perform credibly as an ‘inflation nutter’. In short, the first counterintuitive generalisation suggested by my analysis is that central bank credibility under the inflation targeting regime of the Great Moderation was based on central bankers pretending to be something they were not.

Crucially, the past tense in the previous sentence is due to the fact that the radical expansion of central bank responsibilities in the wake of the recent financial and eco- nomic crisis has abruptly upended this ‘pretence of single-mindedness’. More than any other central bank leader, Mario Draghi epitomises this rupture. Confronted with the expansion of the portfolio of the ECB’s official and de facto responsibilities, which now include financial and macroeconomic objectives, Draghi did not even try to re-enact the ‘inflation nutter’ performance of his predecessors.128_{This key develop-} ment will be further explored in chapter six through an analysis of the ECB’s forward guidance.

128._{The German pension fund manager I interviewed put this succinctly (Interview 19): “With} Draghi, political and economic targets have clearly prevailed over the price stability target.”

4.8.2 The epistemic dimension of credibility: Dependability vs. epistemic authority

Beyond the question of whether pre-crisis central bankers really were the single- minded inflation nutters they pretended to be, this chapter also suggests a second modification to the understanding of central bank credibility.

The rational expectations hypothesis implies that the public cannot be fooled by the central bank (or, in fact, by any other policy-making body). A series of highly in- fluential papers established the view that time-consistency was crucial for the credi- bility of central bank policies (Kydland/Prescott 1977; Barro/Gordon 1983a). These theoretical arguments, together with the practical successes of the notoriously hawk- ish Bundesbank and of the disinflation campaign of the Volcker Fed, helped to make credibility the holy grail of central banking.129_{According to Blinder (2000: 1423), the} monetary policy literature offers three ways of understanding credibility. A central bank can acquire credibility on the basis of a historical record of high inflation aver- sion, because it is “bound by a rule or other ‘commitment technology’”, or because senior central bankers are employed on an “incentive-compatible contract”. Blinder’s own definition is closer to the meaning of ‘credibility’ in everyday usage (2000: 1423): “A central bank is credible if people believe it will do what it says.”

However, the preceding analysis suggests that all three definitions are misleading. As in the case of transparency, the main reason is uncertainty. The economic literature addresses only one of two dimensions of credibility – namely, the ‘moral’ dimension of credibility, that is, the central bank’sdependability. Under this if-then logic, which

129._{As pointed out by Blinder (2000: 1421), the concept of ‘credibility’ had been virtually inexistent} in the literature on monetary policy and central banking prior to 1985, but became highly popular after that.

is often equated with a firm commitment to low inflation, the central bank is credible to the extent that it keeps its promises to implement policies x1or x2if the scenarios y1 or y2occur. Indeed, if dependability was the only game in town, the safe strategy for the central bank would be not to give any guidance regarding the likelihood of future economic scenarios at all, limiting itself to purely conditional statements. However, due to the pivotal importance of private sector expectations for the transmission mechanism of monetary policy, central banks have increased their efforts to guide pri- vate sector expectations about the future – a development that has reached its prelimi- nary endpoint in forward guidance. It is therefore important to make a distinction be- tween dependability and the separate dimension of epistemic authority130_{, defined} as the degree to which market actors are ready to build their own expectations on the central bank’s models and forecasts.131_{A central bank whose commitment to low infla-} tion is widely acknowledged, but whose analytical framework or forecasting methods are viewed as flawed is unlikely to be successful in guiding private sector expecta- tions about the future.

As a consequence, epistemic authority is no less important to central bank perfor- mance than dependability. Indeed, the desire to achieve and maintain epistemic au- thority constitutes the driving force behind the global “scientization of central bank- ing” (Marcussen 2009; cf. Rosenhek 2013). This trend is reflected in the evolution of central banks into research hubs of unprecedented size and scope (White 2005), and

130._{‘Epistemic credibility’ would have contrasted better with the credibility terminology in econom-} ics. But given that ‘epistemic authority’ is a well-established term in IPE (Sinclair 2000), it seems reas- onable to stick to this terminology. The concept is also largely identical, in intent and purpose, with Biersteker and and Hall’s notion of “authority of expertise” or “authority of authorship” (Hall/Bier- steker 2002: 5, 220). For a recent discussion of epistemic authority in relation to central banking, see Rosenhek (2013).

131._{Note that this definition does not require market actors to believe that the central bank’s models} and forecasts are true, but only that they are at least as likely to be correct as their own predictions.

the growing popularity of assigning central bank governorships to accomplished acad- emic (macro-)economists (e.g., Stanley Fischer, Mervyn King, Ben Bernanke, Raghu- ram Rajan, Janet Yellen). The fact that the concentration of intellectual resources at the central bank is unrivalled in the economy gives monetary insiders an extra incen- tive to ascribe special weight to the central bank’s view of the future. Yet whether in- siders do so because of the focal point role of central bank forecasts or because they actually believe in the intellectual superiority of central bank research is a different question – and one with potentially far-reaching implications for the conventional un- derstanding of the role of knowledge in the conduct of monetary governance.

4.8.3 Pretence of knowledge: Pathology or constitutive element of expectation management?

Friedrich Hayek used to warn tirelessly against the dangers of an exaggerated belief in the governability of the economy on the basis of theoretical knowledge: “To act on the belief that we possess the knowledge and the power which enable us to shape the process of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm” (Hayek 1989: 7). Since Hayek, economists have used the pretence-of-knowledge argument, in one form or another, almost constant- ly.132_{As detailed in chapter one, however, this constant presence of warning voices in} the discourse of economics did not prevent the Great Moderation to inspire a new bout of overconfidence regarding the ability of economists and policy-makers to con- trol the business cycle (Woodford 2009).133_{From a post-crisis perspective, the degree}

132._{The argument has been used against Keynesians by Keynesians (Coddington 1976), against} Keynesians by monetarists (Friedman 1968) and by the Lucas-critique (Lucas 1976), against New Classical economics by Larry Summers (1991), and against over-ambitious monetary policy agendas by central bankers such as Alan Greenspan (2004) or Mervyn King (2005).

of overconfidence during the early 2000s is difficult to fathom. It seems all too obvi- ous today that the champions of governability had exaggerated their understanding of and control over the economy – a phenomenon that has been described, in allusion to the Great Moderation, as a “Great Complacence” (Engelen et al. 2011), or, in allusion to Hayek, as a “pretence-of-knowledge syndrome” (Caballero 2010).134 _{The present} analysis of the communicative apparatus of monetary policy, however, suggests an al- ternative interpretation.

As noted above, the discussions of the output gap and of the Survey of Profession- al Forecasters in this chapter suggest that the information provided by a ‘transparent’ central bank does not merely convey information about economic fundamentals but also serves “as a focal point for beliefs” (Morris/Shin 2002: 1522). This focal point role of central bank information arises from the intersubjective nature of economic expectations and is reinforced as market actors become aware that their peers attribute importance to what the central bank says (Morris/Shin 2002, 2005). Market actors are keenly aware of this dynamic. Explicitly mentioning Keynes’ example of the beauty contest, a former bank Chief Economist put it thus:

You have to believe that others believe that the central bank knows more than they do. Even if you believe that the central bank does not know more than the market, even that it knows significantly less than the market, then you still follow the cent- ral bank if you believe that the others believe that the central bank knows more than the market.

(Interview 26)

ing, most macroeconomists, policymakers, and even media shared a sense of optimism that strongly re- sembled the enthusiasm that pervaded academic and policy circles during the ‘Golden Age’ of capital- ism, when the construction of Keynesian governability was completed. This was most strikingly illustrated by the veneration of Alan Greenspan, which in turn was epitomised by Bod Woodward’s evocatively titled hagiography “Maestro” (Woodward 2000). Today, Greenspan’s reputation is in tat- ters, and he is considered by many as a chief culprit of the subprime crisis in the United States (Watson 2014a). For further quotes, see chapter one, section 1.3.4.

134._{For discussions of the temptations and pitfalls of overconfidence, see Baker and Widmaier (2013)} in relation to macroprudential ideas, and Beunza and Stark (2012) in relation to quantitative finance.

In other words, the coordination of expectations around central bank forecasts is con- ditional on the willingness of monetary insiders to act as if they believed that the cen- tral bank knows more than it does actually know or can possibly know. Thus, the sec- ond counterintuitive generalisation emerging from this chapter is that ‘pretence of knowledge’, which has been widely regarded as a pathological development in central banking, has actually been an integral part of the communicative apparatus of expec- tation management.135

Crucially, however, ‘pretence of knowledge’ must always be a fragile arrangement, subject to constant re-negotiation between the central bank and its insider audience under dynamically changing economic conditions. Like ‘pretence of single-minded- ness’, ‘pretence of knowledge’ has experienced a fundamental challenge in the con- text of forward guidance, which – as will be shown in chapter six – has tested the lim- its of the central bank’s power to disentangle and frame long-term private sector expectations.

Before we can get to that, however, chapter five turns its attention to the interac- tion between the ECB and monetary outsiders. The reason for dedicating an entire chapter to this often neglected dimension of central bank agency is that outsiders pose a governability challenge that is different from those posed by (super-)insiders, but no less important to the overall governability of the economy. Moreover, as will also be shown in chapter six, recent events have demonstrated that outsiders’ trust can by no means be taken for granted.

135._{This resonates with research in International Relations on ‘organised hypocrisy’ as a common or-} ganisational principle in international politics (Lipson 2007; Weaver 2008).

5. Governing outsiders: The ideological apparatus of