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WRAP THESIS Braun 2014.Pdf University of Warwick institutional repository: http://go.warwick.ac.uk/wrap A Thesis Submitted for the Degree of PhD at the University of Warwick http://go.warwick.ac.uk/wrap/67054 This thesis is made available online and is protected by original copyright. Please scroll down to view the document itself. Please refer to the repository record for this item for information to help you to cite it. Our policy information is available from the repository home page. Benjamin Braun Central bank agency and monetary governability in the euro area: Governing through money, trust, and expectations Thesis submitted in partial fulfilment of the requirements for a PhD in Politics and International Studies conducted in the Department of Politics and Inter- national Studies at the University of Warwick Supervised by Professor Matthew Watson and Doctor Amandine Crespy September 2014 Table of contents List of tables and figures ... vi List of abbreviations ... vii Acknowledgements ... viii Declaration ... ix Abstract ... x Introduction ... 1 Central banking – a blind spot in the political science literature on central banks? ... 3 The monetary policy paradigm of the Great Moderation, and why it (still) matters ... 6 Analytical framework and theoretical concepts: Central bank agency, governability, performativity, audi- ences, and apparatuses ... 10 Case, data, and methodology ... 15 Contributions to the literature ... 19 Chapter structure ... 22 1. The making and unmaking of governability in macroeconomic discourse ... 26 1.1 Macroeconomic governability paradigms ... 29 1.1.1 Governability paradigms vs. policy paradigms ... 30 1.1.2 Three elements of macroeconomic governability paradigms ... 33 1.2 From Keynesian uncertainty to the neoclassical synthesis ... 35 1.2.1 Phase 1: A new vision – Keynes’ General Theory ... 35 1.2.2 Phase 2: Formalisation and operationalisation – the neoclassical synthesis ... 37 1.2.3 Phase 3: Measurement and quantification – the econometric revolution ... 38 1.2.4 ‘Keynesian’ governability and overconfidence ... 39 1.3 From New Classical ungovernability to the new neoclassical synthesis ... 42 1.3.1 Phase 1: A new Vision – microfounded general equilibrium macroeconomics ... 43 1.3.2 Phase 2: Formalisation and operationalisation – price rigidity, again ... 46 1.3.3 Phase 3: Empirical modelling – the promises and limitations of DSGE ... 48 1.3.4 New neoclassical governability and overconfidence ... 50 1.4 Conclusion ... 52 2. Toward a performative theory of central bank agency and monetary governance ... 55 2.1 State agency in relation to the economy: From mechanical engineering to performative gov- ernance ... 58 2.2 What does it mean to say that central bank agency is performative? ... 65 2.2.1 Monetary governance: From game against nature to game with rational agents ... 66 2.2.2 Central bank agency, governmentality, and performativity ... 68 - i - 2.3 Performation and performance: Two types of performativity ... 70 2.3.1 On the intellectual genealogy of Callonian performativity: Continuity with STS, rupture with eco- nomic sociology ... 72 2.3.2 The process of performation: Disentangling and framing ... 74 2.3.3 Performance as act or ritual ... 76 2.4 Disaggregating ‘the public’: Towards a multidimensional conception of central bank agency ... 79 2.5 Three apparatuses and three performative modes of monetary governance ... 83 2.5.1 The financial apparatus of monetary policy implementation: Governing the money market ... 86 2.5.2 The communicative apparatus of expectation management: Governing insiders ... 87 2.5.3 The ideological apparatus of monetary trust: Governing outsiders ... 88 2.6 Conclusion ... 89 3. Governing the money market: The financial apparatus of monetary policy implemen- tation ... 92 3.1 The money market and the transmission mechanism of monetary policy ... 95 3.2 The operational framework of the Eurosystem as of 1999 ... 102 3.2.1 Minimum reserve requirement ... 102 3.2.2 Open market operations ... 106 3.2.3 Standing facilities ... 108 3.3 Governing through money in good times and in bad ... 110 3.3.1 Contested collateral: The evolution of the collateral framework, 1999-2014 ... 111 3.3.2 From supply-driven to demand-driven liquidity provision: The evolution of the tender procedures of the Eurosystem, 1999-2014 ... 119 3.3.3 Centralising central banking? Central bank agency and monetary governability under structural li- qudity surplus conditions ... 128 3.4 Conclusion ... 133 4. Governing insiders: The communicative apparatus of expectation management ... 137 4.1 Expectation formation as the performative effect of a communicative apparatus ... 138 4.2 The transparency paradox ... 142 4.3 Monetarist prologue I: Disentanglement and framing under the Fed’s Reserve Position Doctrine (1979-1982) ... 145 4.4 Monetarist prologue II: Disentanglement and framing under the Bundesbank ... 147 4.5 The monetary policy strategy of the Eurosystem ... 150 4.6 Elaborating the communicative apparatus: The early years of EMU ... 155 4.6.1 Ambiguity in the monetary policy strategy: The definition of price stability and the role of the monetary pillar ... 157 4.6.2 The question of forecast transparency ... 159 4.7 The communicative apparatus of the euro area in action ... 163 - ii - 4.7.1 Silence around the monetary pillar ... 164 4.7.2 Pavlov’s dog and the inflation Taliban ... 165 4.7.3 The curious case of ultra-stable inflation expectations ... 168 4.7.4 Does the ECB really know the value of the output gap? Does it matter if it doesn’t? ... 170 4.8 Conclusion: Performance, credibility, and knowledge in monetary governance ... 172 4.8.1 The performative dimension of credibility: ‘Inflation nutters’ and pretence of single-mindedness: ... 172 4.8.2 The epistemic dimension of credibility: Dependability vs. epistemic authority ... 175 4.8.3 Pretence of knowledge: Pathology or constitutive element of expectation management? ... 177 5. Governing outsiders: The ideological apparatus of monetary trust ... 180 5.1 Studying monetary trust: An interdisciplinary project ... 181 5.2 The international political economy of money, trust, and central banking ... 185 5.3 Money as credit and the hierarchy of money ... 189 5.4 Money and ‘ideological naturalisation’: Towards a performative theory of money ... 194 5.5 The sociology of monetary trust and the ideological apparatus of monetary policy ... 197 5.6 After Bretton Woods: Performing credit money with disinflation, low inflation, and quantitative easing ... 201 5.6.1 ‘Look, no hands’: Why the Volcker Fed pretended to target monetary aggregates ... 202 5.6.2 Money under control: Performing the fiction of exogenous money in the euro area ... 206 5.6.3 We don’t control money! Why the Bank of England started worrying and stopped loving monet- ary ignorance ... 216 5.7 Conclusion: The myth of the end of the mystique of central banking ... 219 6. Fragile governability: The three apparatuses during the financial crisis ... 222 6.1 Policy implementation after the crisis: Performing a governable ABS market ... 224 6.1.1 Performing a new and ‘improved’ market for asset-backed securities ... 225 6.1.2 Expanding the reach of the financial apparatus: The ABS market as a precondition for a potential future quantitative easing programme ... 230 6.2 Expectations during the crisis: Forward guidance ... 234 6.2.1 Revolution or evolution? ... 236 6.2.2 Making the long-term interest rate a policy variable ... 237 6.2.3 How forward guidance has weakened the communicative apparatus by undermining ‘pretence of knowledge’ ... 239 6.3 Public monetary trust during the crisis: The case of the TARGET2 debate in Germany ... 245 6.3.1 A primer on the economics of TARGET2 ... 247 6.3.2 The politicisation of the euro area’s automated payment settlement system in Germany ... 255 6.3.3 Central bank ‘transparency’ in light of the impenetrable complexity of TARGET ... 259 6.4 Conclusion ... 261 - iii - Conclusion ... 265 Fragile monetary governability: The three apparatuses in good times and in bad ... 267 The financial apparatus ... 267 The communicative apparatus ... 269 The ideological apparatus ... 271 The ECB and the ‘strange non-death of neoliberalism’: How taking central bank agency seriously complicates the picture yet is essential to understanding it ... 272 The ECB as an agent of financialisation ... 274 The ECB and the return of hydraulic macroeconomic governance ... 277 Central banking as central planning ... 280 The institutional entrenchment of the financialisation-ECB empowerment nexus and the prospects for change – bringing outsiders back in ... 281 Appendix 1: List of Interviews ... 286 Bibliography ... 288 - iv - List of tables and figures Figure 1: The transmission mechanism of monetary policy in the euro area ... 61 Figure 2: Convergence of bureaucratic authority and market transactions in central bank practice ... 70 Figure 3: The analytical framework: Three dimensions of central bank agency and three performative modes of monetary governance ... 86 Figure 4: The yield curve for AAA-rated euro area central government bonds as published by the ECB on 12 May 2014 ... 98 Figure 5: How the minimum reserve requirement increases the dependency of the banking system on ECB liquidity and enlarges the balance sheet of the Eurosystem ... 105 Figure 6: Illustration of the ECB’s corridor approach: Key interest rates and EONIA,January 1999 - August 2014 ... 110 Figure 7: Consolidated balance sheet of the Eurosystem, January 2007 - July 2014, EUR trillions ... 127 Figure 8: Issuance and use in
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