Central Banks and the Politics of Expectations: How Monetary Policymaking Yields Pro-Finance Decisions

• In Event: 328 - Section on Economic Sociology. Markets, Finance, Credit, and Money

Abstract

Central banks have gone through a significant transformation since the 1990s. Under financial globalization, central banks are independent institutions that pursue price stability, reflecting financiers’ policy preferences. Despite the widely-held conviction about their being pro-finance, we still know little about those mechanisms through which monetary policymaking at the micro level yields decisions favorable to financiers. This paper addresses this gap. It studies the struggle between the central bank and the financial community over shaping monetary policy outcomes through the lens of expectations. Whether monetary policy outcomes reflect the policy preferences of the central bank ultimately depends on whether or not it has credibility to successfully influence financiers’ expectations. The paper focuses on the Central Bank of Turkey - a case that fails to influence market expectations- and advances the mechanism of ‘following the markets’; that is, adopting and validating financiers’ expectations for interest rate decisions. Using its post-2010 unorthodox policy, the paper demonstrates how the loss of credibility pushes the central bank to follow the markets. The central bank eventually succumbs to enacting financiers’ interests by validating their expectations for interest rate decisions, even when central bankers view those decisions as undesirable. The data come from public texts and 90 interviews conducted with (1) central bankers, and (2) financiers in Turkey and London. The paper contributes to sociological literature by studying central banking through the prism of the politics of expectations, and also theorizing how central banks fail to influence market expectations and its consequences.

Author

• Ayca Zayim, University of Wisconsin-Madison