171107 - Constitutional Democracy and Central Banking in the Shadow of Financial Panic
SGCEE "Constitutional Democracy and Central Banking in the Shadow of Financial Panic"
Tuesday 7 November 2017, 12.30 - 2.30 pm, Sciences Po, Room Goguel, 56, rue des Saints-Pères (Entrance through the 27 rue Saint-Guillaume), 75007 Paris
Central banks have long served as lenders of last resort (LOLR) on a variety of financial markets. This paper, drawn from a larger book project, examines how this panic-calming function affects the relationship between democracy and central bank independence (CBI). Ideally, CBI should facilitate democracy’s operation by ensuring accountability of politicians to voters, reasoned and honest deliberation over policy, and maximising the space for policy choice in the face of explicit or implicit threats of disinvestment. Yet CBI fails to secure these three desiderata in the context of a prospective market panic. When CBI empowers the central bank to decide whether to act as lender of last resort, it can threaten not to, thereby exercising enormous influence over elected policy-makers and undermining democratic accountability. Furthermore, efforts to make such threats credible can lead the central bank to exaggerate its tolerance for financial catastrophe, preventing reasoned and honest deliberation. Finally, threats to refrain from acting as a LOLR deploy the prospect of market disinvestment to coerce policy-makers, rather than maximising their autonomy from it. Case studies, including the early stages of the Eurozone crisis, demonstrate these points. The paper concludes by considering alternative institutional arrangements.
David Woodruff is Associate Professor of Comparative Politics at the LSE. He previously taught at the Massachusetts Institute of Technology and Harvard University. He is the author of Money Unmade: Barter and the Fate of Russian Capitalism (Cornell University Press 1999), as well as articles in journals including Politics & Society and Review of International Political Economy. With Ariane Fischer and Johanna Bockman, he recently completed a translation of Polanyi’s 1922 article “Sozialistische Rechnungslegung” (“Socialist Accounting”), which appeared in Theory & Society in 2016.
Zoé Evrard, Sciences Po, CEE and MaxPo
Matthias Thiemann, Sciences Po, CEE
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