Growth models and central banking: dominant coalitions, organizational sense-making, and conservative policy innovations at the Bundesbank and Fed

Abstract

This article revives the comparative political economy of central banking. Drawing on growth models theory, I argue that export-led and debt-led growth models imply fundamentally different versions of central banking and rely on different combinations of monetary, financial, and exchange-rate policies. Historical institutionalists plausibly argue that central banks have learned to pursue these policies because dominant coalitions have shaped central banks’ institutional roles. But since the 1970s, policy activism has become more important. To explain why the Bundesbank and Federal Reserve have come to support the German and US growth models during Post-Fordism, I look at how sense-making processes informed policy innovations. In the German case, the Buba carved out a powerful disciplining role for itself in corporatist coordination, which aligned with the demand-restraining features of Germany’s export-led model; corporate profit expectations signaled economic health. A dilemma arose with deteriorating price competitiveness that the Buba resolved by imposing an export version of secular stagnation. In the US case, Paul Volcker’s aggressive interest rate hikes to eliminate ‘inflation scares’ ushered in an area in which monetary policy became focused on bond market credibility. Greenspan consolidated central banking for financialization by hardening the Fed’s bail-out promise and its focus on ‘wealth effects’.

Keywords:

• Central banking
• growth models
• financialization
• export-led growth
• organizational sense-making

Correction Statement

This article has been corrected with minor changes. These changes do not impact the academic content of the article.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 First President of the Bank Deutscher Länder (the provisional central bank set up during post-war occupation), Wilhelm Vocke stated in a famous speech that “’we do not serve the industry, nor do we serve the workers, or agriculture, or any other group, however important it may be […] if independence it is to be, let us first of all be independent of sectional interests!’” (Vocke, at Übersee Club Hamburg, 7 November 1955, cited in Mee, 2019, pp. 167–169)

2 As one example, the Bundesbank urged trade unions in its monthly bulletin from September 1977 to lower their demands; “restraint in the ‘distributional struggle’ is…urgently required to prevent the rekindling of inflationary expectations, which might deter savers and disrupt the capital market.” (Bundesbank Monthly Report, September 1977: 3). The effectiveness of this “incomes policy in disguise” was reflected in a statement by official Ottmar Issing, who noted that “management and labor repeatedly accepted the constraints imposed by monetary policy” (1997, p. 78). The implication was a secular trend of a falling wage share and disposable household incomes, which helped set the conditions for export-led growth.

3 Joe Grice, “Report of a visit to the Bundesbank and to the German Federal Ministry of Finance”, 12^th-14^th May 1987 (BoE Archive 2A182/10). “There appears to have been little discussion in Germany about the cost imposed on banking intermediation by the existence of minimum reserve requirements and its effects in driving business elsewhere, probably for a number of reasons. Prime amongst these no doubt is the dominance of the universal banking system and the lack of development of other markets.” (Townsend, “The Implementation of Monetary policy in Germany”, 21^st November 1985, BoE Archive 2A182/22)

4 Minutes of the Bundesbank Zentralbankrat, 19th September 1986 (Bundesbank Archive).

5 Bundesbank monthly report, February 1991: 8.

6 FOMC, Transcript 2^nd June 1979, p. 10, cited in Lindsey et al. (2013, p. 493). Robert Hetzel argues that, “[c]onsistent with his early background in financial markets at the New York Fed and with his oversight of the Bretton Woods system at the Treasury, Volcker focused on expectations. Moreover, he acted on the belief that credible monetary policy could shape those expectations.” (Hetzel, 2008, p. 150)

7 “The forces influencing interest rate levels seem to have been largely expectational in nature. Rates have remained high in the face of decelerating inflation and a slackening in economic activity, as participants seem to have become more sensitive to the implications of the System's monetary targets for future financial market conditions.” Greenbook for the FOMC meeting on 18^th August 1981.

8 Fed Greenbook, August 1990.

9 Interview Ed Boehne with Robert Hetzel. See also Axilrod (2009, p. 138) and Krippner (2011, p. 130).

Additional information

Notes on contributors

Leon Wansleben

Leon Wansleben is sociologist and research group leader at the Max Planck Institute for the Study of Societies. In The Rise of Central Banks (Harvard UP 2023), he explores the transformation of central banking since the 1970s. His more recent work comparatively explores how bureaucratic cultures and structures influence states’ capacities to conduct climate policies. Previous research is published in Socio-Economic Review, Theory and Society, Regulation and Governance etc.