https://orcid.org/0000-0001-8075-2357
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Abstract
How did potentially transformative ideas about the way economies should function become enlisted in policy frameworks that produced few major changes to policy orthodoxy at the Federal Reserve after the financial crisis of 2007/08? IPE scholarship has tended to answer this question by identifying the limited purchase of Keynesian ideas in policy circles. In so doing, however, the existing literature has left unexplained the central role of Keynesianism in the Federal Reserve’s ideational framework. To fill a gap in this literature, this article argues that ideas fill different functions (cognitive and normative) in the policy process and proposes a new explanatory model, ‘depoliticised Keynesianism’, for understanding the role that Keynesian ideas played in ideational change at the Federal Reserve after the financial crisis of 2007/08. Using in-depth interviews with current and former Federal Reserve officials, and a quantitative text analysis of Federal Open Market Committee meeting transcripts between 1981 and 2014, it traces the rise of depoliticised Keynesianism to policymakers’ normative commitment to depoliticisation and a cognitive interpretation of Keynesian ideas.
Acknowledgements
I would like to thank Martijn Konings, Matthias Thiemann and the two anonymous reviewers for their insightful commentary on various iterations of this paper.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 See, for example, Abolafia (Citation2010), Fligstein et al. (Citation2014), Golub et al. (Citation2015) Thornton (Citation2006) and Chappell Jr and McGregor (2004).
2 Transcripts have been read by an optical character reader (OCR) in the R environment. Effort has been taken to ensure that all words have been transcribed correctly however the OCR occasionally misses or mistranscribes words, especially in older transcripts. In addition, word count percentages include extraneous matter (lists of who is in attendance, page numbers, etc.). However, the number of additional words is reasonably uniform between transcripts. Finally, only the transcripts of official meetings have been included in the dataset. Transcripts for FOMC meetings conducted by conference call between 1981 and 1987 are not available.
3 CPI growth averaged 8.9% between 1973 and 1980 (Morgan, Citation2012, p. 560).
4 The concept of the political business cycle gained popularity in part because the Nixon White House tapes recorded several conversations between the President and Federal Reserve Chair Arthur Burns about the need to ease conditions in the lead-up to the presidential election in 1972 (Abrams, Citation2006, pp. 180–185; Keller & May, Citation1984).
5 In contrast, monetarism appeared to function more effectively as a guiding framework in corporatist economic regimes with more centralized wage-fixing systems like Switzerland and Germany (Hall & Franzese, Citation1998; Johnson, Citation1998, pp. 71–116; Wansleben, Citation2018).
6 For an explanation of the role that internal risk models played in banking regulation, especially the Basel Accord of 1988 and Market Risk Amendment of 1996, see King and Sinclair (Citation2003).
7 The four departments are: Complex Financial Institutions (CFI), Large International Financial Institutions (LIFI), Financial Market Infrastructure (FMI), and Regional, Community and Foreign Institutions (RCFI) (Eisenbach et al., Citation2017, pp. 66–67).
8 The Tinbergen rule or principle refers to Jan Tinbergen’s (Citation1952) principle that there should be a specific instrument for every policy target. It should also be noted that Quarles approach is a stronger application than former Vice-Chair Stanley Fischer (Citation2016) who argued that macroprudential tools are the “first line of defense” but at least left open the possibility of resorting to policy-rate changes in exigent circumstances.
9 Interview with former Federal Reserve official, 21 February 2020.
10 The term “Minsky moment” was coined by Paul McCulley at PIMCO in 1998. It gained popularity during and after the financial crisis of 2007/08 as an explanation of the sudden outbreak of financial distress precipitated by cascading defaults and devaluations (Whalen, Citation2008, p. 249).
11 Interview with Dr Andreas Lehnert, 16 October 2019.
12 Interview with former Federal Reserve official, 21 February 2010.
13 Interview with Dr Andreas Lehnert, 16 October 2019.
14 For example, Dr Lehnert states, “Down the road, there’s absolutely one road in which minimum downpayments, maximum payment-to-income ratios are adjusted in the same way as interest rates” but asks “Would societies be more comfortable having these tools under somebody other than the central bank?” (ibid.)
15 The search was conducted using the word stem ‘monetaris*’ so the data includes references to monetarism, monetarist and monetarists.
16 This figure measures the number of mentions per meeting of ‘Keynes’ or ‘New Keynes’ and all words deriving from these stems (ignoring case).
17 The figure includes references to ‘Taylor’s rule’.
18 Search term: “supervis*”.
19 The data includes all derivations of the word stems ‘financ*’ and ‘regulat*’ as adjacent terms.
20 The plot displays a sum of references to ‘New Keynes-’ and Keynes (without ‘new’) to form a single column for each meeting.
21 The figure includes references to all derivations of the word stems ‘financ*’ and ‘stabili*’.
Additional information
Notes on contributors
Oliver Levingston
Oliver Levingston is a postdoctoral researcher at Sciences Po. He holds a PhD in Political Economy from the University of Sydney and is currently studying financialisation and the political economy of central banking in the United States and Australia.