Growth models and central banking: dominant coalitions, organizational sense-making, and conservative policy innovations at the Bundesbank and Fed

Abstract

This article revives the comparative political economy of central banking. Drawing on growth models theory, I argue that export-led and debt-led growth models imply fundamentally different versions of central banking and rely on different combinations of monetary, financial, and exchange-rate policies. Historical institutionalists plausibly argue that central banks have learned to pursue these policies because dominant coalitions have shaped central banks’ institutional roles. But since the 1970s, policy activism has become more important. To explain why the Bundesbank and Federal Reserve have come to support the German and US growth models during Post-Fordism, I look at how sense-making processes informed policy innovations. In the German case, the Buba carved out a powerful disciplining role for itself in corporatist coordination, which aligned with the demand-restraining features of Germany’s export-led model; corporate profit expectations signaled economic health. A dilemma arose with deteriorating price competitiveness that the Buba resolved by imposing an export version of secular stagnation. In the US case, Paul Volcker’s aggressive interest rate hikes to eliminate ‘inflation scares’ ushered in an area in which monetary policy became focused on bond market credibility. Greenspan consolidated central banking for financialization by hardening the Fed’s bail-out promise and its focus on ‘wealth effects’.