Historical developments during recent economic history have demonstrated a remarkably parallel development of international capital mobility (ICM) and central bank independence (CBI), making both fundamental factors of today’s monetary system. Neoliberal economic models depict the anti-inflationary credibility associated with CBI as the outcome of strict market rules, insulating policy from political control. The structural power of mobile capital subsequently forced governments to adopt it as policy. However, the theoretical assumptions underlying these arguments misrepresent current realities and obscure the fact that credibility is a social phenomenon. Looking at CBI as a social institution shows that it facilitates a consensus between current political and market interests. For financial market actors, CBI functions as a guide for their intersubjective expectations and ensures the continuity of the current economic order with the financial markets at its centre. Governments consciously support the embedding of society within these markets, while shielding themselves from the reputational costs of adverse market outcomes. Within this consensus, substantial indirect state control over policy decisions remains. Consequently, CBI’s central importance does not lie in anti-inflationary credibility derived from the removal of political control, but in its institutional role as a link between political and market interests in contemporary financial governance.
Table of Contents
1. Introduction
2. Historic developments
3. The credibility of CBI and the structural power of ICM
4. The social basis of CBI
5. The state-market consensus
6. Conclusion
Objectives and Research Themes
This work examines the evolution and function of Central Bank Independence (CBI) within the global context of International Capital Mobility (ICM), challenging the orthodox neoliberal view that CBI is merely a technical tool for anti-inflationary credibility by highlighting its role as a social institution that bridges political and market interests.
- The historical correlation between the rise of International Capital Mobility and the adoption of Central Bank Independence.
- Critique of the 'credibility hypothesis' and the neoliberal assumption that CBI is solely about insulating policy from politics.
- Application of social institutional theory to understand how central banks function as a link in contemporary financial governance.
- The political motives behind the state's decision to promote CBI, including the 'depoliticization' of economic crisis management.
Excerpt from the Book
The credibility of CBI and the structural power of ICM
The role of increasingly independent central banks in a world of ICM attracted considerable scholarly interest. Most commentators argue along dominant neoliberal lines, portraying CBI as a way to overcome inherent political weaknesses and envisioning it as a new monetary anchor based on anti-inflationary credibility. Its widespread adoption, despite the loss of political control it represents, is attributed to the structural power of highly mobile capital.
The rise of neoliberal ideas altered the way in which economic incidents were subsequently interpreted. The ‘stagflation crisis’ of the early 1970s was portrayed as the result of discretionary monetary policy exploiting the sudden disappearance of constraints associated with former fixed exchange rates or metallic pegs (Clark 2003:37). The solution was seen in the return to a rule-based system (Fischer 1996:1170), which could overcome the ‘time-inconsistency problem’ between short term political interests and long-term economic inflation targets (Elgie and Thompson 1998:18). This idea is based on three general assumptions (Giovannini 1993:111).
Summary of Chapters
1. Introduction: This chapter contextualizes the emergence of central bank independence and international capital mobility as fundamental shifts in the modern monetary system, outlining the central research aim of analyzing CBI as a social institution rather than a purely technical one.
2. Historic developments: This section traces the historical phases of capital mobility and central banking, illustrating how the transition from the gold standard to the Bretton Woods era and subsequent neoliberal reforms shaped current monetary policies.
3. The credibility of CBI and the structural power of ICM: This chapter critiques neoliberal arguments regarding the 'credibility hypothesis' and explores how the structural power of mobile capital is theorized to necessitate independent, inflation-averse monetary institutions.
4. The social basis of CBI: This section moves beyond economic modeling to suggest that CBI relies on social foundations and intersubjective understandings, utilizing a social theory framework to redefine its institutional role.
5. The state-market consensus: This chapter analyzes how CBI acts as a bridge between political and market interests, facilitating an 'open market sound money consensus' while allowing states to maintain indirect policy control.
6. Conclusion: The conclusion synthesizes the argument that CBI is a critical element in global financial governance, maintaining its relevance even amidst the volatility and crises experienced by global financial markets.
Keywords
Capital Mobility, Central Bank Independence, Central Banks, Financial Liberalization, Political Control, Anti-Inflationary Credibility, Capital Mobility Hypothesis, State-Market Consensus, Monetary Policy, Neoliberalism, Social Institutions, Intersubjective Expectations, Financial Governance, Economic History, Discretionary Policy
Frequently Asked Questions
What is the primary focus of this research?
The work examines the relationship between Central Bank Independence (CBI) and International Capital Mobility (ICM), arguing that CBI serves as a critical social institution in contemporary financial governance.
What are the central thematic areas?
The study covers the history of monetary policy, the evolution of the neoliberal economic model, the 'credibility hypothesis', and the social construction of central bank authority.
What is the core research question?
The research asks why governments adopt Central Bank Independence and how, despite theoretical claims of removing political control, it functions effectively as a bridge between state and market interests.
Which scientific methodology is utilized?
The author employs an institutionalist approach, particularly drawing on social constructivist theories and John Searle's framework on social institutions, to analyze monetary governance.
What topics are discussed in the main body?
The main body discusses the historical correlation between capital flows and central bank statutes, critiques the neoliberal 'time-inconsistency' problem, and explores the political motives behind depoliticizing economic management.
Which keywords best describe this study?
Key terms include Capital Mobility, Central Bank Independence, Credibility Hypothesis, Intersubjective Expectations, State-Market Consensus, and Financial Governance.
How does the author define the 'state-market consensus'?
The author defines it as an institutional arrangement where CBI serves as a facilitator, aligning market expectations with policy while allowing governments to avoid reputational costs from market fluctuations.
Why does the author argue that the 'capital mobility hypothesis' is incomplete?
The author contends that the hypothesis assumes perfect capital mobility, which overlooks the remaining national imperfections and 'home bias' that actually keep capital dependent on state-provided institutional stability.
- Quote paper
- Matthias Baumgarten (Author), 2011, The Role of Central Bank Independence in a World of Capital Mobility, Munich, GRIN Verlag, https://www.grin.com/document/187940
