How Financial Power Really Works: Central Bank Predictability and the Management of Expectations

• In Event: 118 - Section on Economic Sociology Refereed Roundtable Session and Business Meeting
  In Refereed Roundtable 60min: Table 01. Central Banking

Abstract

This paper examines the rise of finance and its growing influence over central bank policy in the last three decades. There is a near consensus that global finance is a major constituency in the making of monetary policy and policies of independent central banks benefit financiers. Despite this consensus, our sociological understanding of central banking and the relations between central banks and the financial community is limited. This paper develops a theoretical framework to unpack how financial power operates over monetary policymaking. It advances a conceptualization of financial interests based on expectations. It describes the relationship between the central bank and the financial community as a sequential, repetitive game. In this interaction, the central bank’s level of credibility conditions its policy options and the financial community’s reactions to the central bank’s policy moves. The paper illustrates the theoretical framework using a deviant case, the Turkish central bank. The Turkish central bank introduced an unconventional policy framework in 2010 following the Financial Crisis. Under the new framework, it strategically creates uncertainty about its future policy decisions. The paper examines the inception, workings and decline of this unconventional policy. It uses public texts and over ninety semi-structured interviews conducted with Turkish central banks, and financiers in Turkey and London. This paper aims to contribute to the growing sociological literature on the rise of finance by providing a midrange theory of the processes and mechanisms by which the financial community influences monetary policy and examining the contours of the policy space policymakers have.

Author

• Ayca Zayim, University of Wisconsin-Madison