Unexpected Revolutionaries: How Central Banks Made and Unmade Economic Orthodoxy, by ManuelaMoschella (Cornell University Press)

The Courage to Act is the title of Ben Bernanke's autobiography. It is in reference to the extraordinary actions the Fed took in response to the global financial crisis. But is the title correct? Were central banks courageous? In her book Unexpected Revolutionaries: How Central Banks Made and Unmade Economic Orthodoxy Manuela Moschella presents new evidence on how central banks make decisions. Her key conclusion is this: it is not as simple as Bernanke implies. Go back to 2008. There is no doubt that central banks took extraordinary actions in response to the global financial crisis. They recapitalised banks, slashed interest rates to zero and implemented an unprecedented asset purchase programme. The Fed's balance sheet went from $800 million in 2008 to almost $2.4 trillion by 2010. The actions were extraordinary, and they were courageous under the orthodox view of central banks. Under this view, central banks are technocratic and apolitical: technocratic because their decisions are driven by the best-available data and theory on how the economy works, and apolitical because their decisions are not swayed by what is politically popular. Central banks were courageous because they could calmly assess what needed to be done through the best-available evidence at the time and do it despite the political minefield that lay in front of them. But Moschella challenges this orthodox view. In doing so, she sets up a new framework that neatly explains many of the puzzles around central banks in recent years. Moschella's argument is as follows. She argues that central banks are fundamentally political institutions. Yes, they are independent in the legal sense, but in reality they can act only if they have broad support from a range of heterogeneous actors across society: from politicians and financial institutions through to trade unions and civil society. How do central banks get this support? They get it through ‘reputation’: they have cultivated a reputation since the 1970s that has two core pillars: being conservative and being apolitical. This reputation was largely kicked off by Paul Volcker and his whatever-it-takes approach to wringing inflation out of the US economy in the 1970s. It is this reputation that underpins the public support central banks need to act. Thus far, this might seem like a fairly inconsequential finding, but its implications become more profound when we think of the shift by central banks from fighting inflation to fighting deflation during and after the 2008 crisis. In an inflationary economy, things are relatively straightforward. Central banks can tighten monetary policy to reduce inflation: entirely consistent with their reputation of being conservative and apolitical. In a deflationary economy, however, things are more complicated, particularly beyond the zero lower bound. Asset purchases and bank recapitalisations have more visible distributional effects between firms and across society. Both sit uncomfortably with the conservative and apolitical reputation cultivated by central banks. This requires central banks to deviate from their reputation, which means, as political institutions, they need to rebuild their basis of political support. This takes time (which results in costly delays) and it takes compromise (which involves an expansion in the objectives of central banks). And this is the core value of the book: it offers a framework that provides an internally consistent explanation to three key questions about central banks that I have struggled with in recent years. The first question is: why have central banks expanded their focus in recent years to include factors like climate change and inclusive growth when, traditionally, central banks have dismissed these objectives as being structural problems that require structural solutions? Moschella's framework gives an answer. When central banks shifted from fighting inflation to fighting deflation during and after the global financial crisis, they deviated from their reputation of being conservative and apolitical. Bailing out specific financial institutions and purchasing assets had distributional effects, which, to put it bluntly, annoyed the political left. To rebuild their support base within the community, central banks adopted new objectives around issues the left cared about – action on climate change and the importance of inclusive growth – and the role that monetary policy can play in both. The second question is: if central banks are politically independent, why have they been slow to respond to crises in some instances (think: the European Central Bank (ECB) and the European Debt Crisis) and, at times, been inconsistent in their responses (think: the Fed letting Lehman Brothers collapse)? Moschella's framework gives a clear answer to this: when central banks deviate from their reputation, it takes time to build political support for their actions. The Fed did not bail out financial institutions until it had the support of the administration. The ECB did not implement its Outright Monetary Transactions programme until it had built the political support it needed. Deviating from their reputation meant they needed to build fresh support in the community, and this took time. The third question is related to this: why have central banks struggled to be symmetric in their policy responses? Why have they failed to respond to deflation with the same vigour in which they respond to inflation? The answer Moschella's framework gives to the preceding question applies here, too. The carefully cultivated reputation of central banks gives them the political support they need to fight inflation. But when it comes to unconventional policies, they cannot act until they have built political support to do so. The delays and other challenges associated with this mean they can move quickly and easily to fight inflation but face barriers in the other direction. Moschella presents a neat, internally consistent framework for thinking about central banks, which I found convincing and compelling. Therefore, who should read this book? My background is in economics, and I have no experience in political science. Although I found some of the political science language heavy at times, I found it pretty accessible, and it provided an interesting angle for a topic that I have considered only from an economics angle. On that point, the book assumes a reasonable amount of knowledge around central banking. It does not go into detail explaining the hows and whys of asset purchase programmes or the facilities used by central banks to implement monetary policy. If you are not familiar with these concepts, you might need to pause occasionally to do some googling. The book is also a great account of economic history since the 1970s, the role central banks have played in that history and how these institutions have changed over time. I always enjoy the books/autobiographies of central bankers for exactly these sorts of insights – the books by Ben Bernanke, Mervyn King and Mark Carney are all great reads – but I have also worried to what extent their version of history is being skewed in favour of the writer and their institution. Moschella cuts across this. She is thoroughly evidence based and provides a balanced perspective on the contributions made by central banks. Therefore, what happens next? Moschella's framework would suggest that central banks are in a tough spot. They have more objectives than instruments. They have taken on increased responsibilities at a time when their core objective of fighting inflation is, at least in 2024, as important as ever. If a world of secular stagnation returns once the currently inflationary environment subsides, central banks will again find themselves deviating from their orthodox reputation, if that even still exists. How will central banks survive? Time will tell.