Central Banking: Finance, Politics, and Monetary Policy

The 2008 financial crisis brought to light the dangers of credit creation happening outside of the regulated banking sector—so-called “shadow banking.” In response to the breakdown of liquidity in financial markets, and more recently in the wake of the Covid-19 pandemic, central banks around the world came to adopt “unconventional” forms of monetary policy to support the economy. In the U.S. specifically, the interventions of the Federal Reserve have been unprecedented, with large-scale purchases of debt securities through multiple rounds of quantitative easing, injecting newly created money into our financial system. For its proponents, such radical interventions were justified because standard monetary policy instruments had become ineffective, with interest rates approaching zero. It seemed that we were living in a world where interest rates were permanently at or even below zero (at least adjusted for inflation). While many celebrated the Fed’s expansion of its toolkit to stabilize financial markets and support the flow of credit in the economy, critics pointed out that the Fed’s policies may actually have been worsening economic inequality and introducing potential sources of macroeconomic instability (such as inflation and currency devaluation). Then, in response to inflationary pressures, the Federal Reserve reversed its policy and embarked on a path to monetary tightening. Other central banks followed suit.

How can we understand the functions and responsibilities of central banks in the economy? Why is Fed policy now one of massive and sustained intervention, and what does it tell us about the state of the U.S. and global economy? In this course, we’ll aim to understand the historical emergence and theoretical, legal and even ideological underpinnings of central banking. We’ll consider institutional arrangements, the design of various international monetary systems and hierarchical underpinnings, as well as modern challenges to central bank governance. What are the objectives of monetary policy—and are they changing over time? What role have central banks played in shaping capitalism? How does our understanding of money (as commodity, credit, or a creature of the law) influence the answer to these questions? The course will survey different schools of thought in economics (Keynesian, post-Keynesian, Austrian, monetarist, Modern Monetary Theory) and draw from the recent work of scholars such as Christine Desan, Perry Mehrling and others, as well as research published by the Fed, the Bank of England, and the Bank of International Settlements.