The new normal? Central banks as social insurers and reputation-protecting political agents

An idée fixe of Great Moderation economic policy was that central banks are only effective
macroeconomic managers when they are segregated from electoral politics. That idea made a swift transition from radical heterodoxy to commonsensical orthodoxy during the 1980s and proved remarkably resistant to reality during the 2008 financial crisis. After almost twenty years of ‘unconventional’ monetary policy, scholars, policymakers, and politicians are justifiably searching for more credible ways to conceptualise and use the nation-state’s monetary authority. Two recent books provide vital energy for that intellectual exercise. Éric Monnet’s Balance of Power is a bold re-conceptualisation of monetary authority as a welfare-state support in liberal democracies. In addition to dissipating the illusion that central banks are simply interest-rate-setting inflation fighters, Monnet presents a systematic argument for integrating them into a web of deliberative institutions (including public development banks and economically empowered parliaments) to bolster the legitimacy and effectiveness of monetary policy. Relatedly, Manuella Moschella’s Unexpected Revolutionaries attacks the idea that central bankers are responsive only to technocratic doctrine and private-market behaviour, showing how monetary authorities sculpt policies to bolster their reputation with political actors. Paying close reference to private-market liquidity guarantees and quantitative easing, Moschella maps the fortunes of unconventional policy in alignment with political support for financial-market backstops and exceptional economic stimulus. Both books provoke readers to jettison the anodyne generalities of central banks’ own glossy pamphlets and think afresh about the possibilities of economic policy’s new normality.