Central banking in hard times: Knowledge, legitimacy, and politics

• Applicant: Dr. Benjamin Braun
• Subject Area: Political Science
• Term: since 2023
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 510239627

Central banking is experiencing a severe crisis of both policy knowledge and political legitimacy. Since the global financial crisis of 2008, central banks – and the broader macro-financial order of which they are the key pillar – have become increasingly contested, both among experts and in the broader public sphere. How do central banks navigate this newly politicized landscape? How do monetary theory and practice evolve under this legitimacy pressure? To answer these questions, KNOWLEGPO will develop an innovative theoretical and methodological framework that studies the relational legitimacy management of central banks. Our mixed method approach will combine quantitative text analysis with qualitative process tracing. This framework is organized around three main variables: publics, epistemic contestation, and political contestation. First, KNOWLEGPO postulates that central banks simultaneously interact with several distinct publics – financial markets, their own governments, the broader public, and an expert community of academic and central bank economists. Second, central bank knowledge may be held with a high or a low degree of epistemic consensus. Finally, central bank practices occur amidst high or low political contestation. Our main hypothesis is that central bankers prefer to operate in an environment defined by epistemic consensus and quiet politics, and will adjust their discourse and policy stance in order to reduce epistemic dissensus and/or escape noisy politics. Epistemic consensus and quiet politics are easily destabilized, however: established policy paradigms tend to become less effective over time (‘Goodhart’s law’); new theoretical paradigms may lag behind practical, crisis-induced policy innovations; and public expectations shift under changing economic and political conditions. KNOWLEGPO will investigate how central banks adjust their discourse and policy stance under conditions of epistemic and/or political contestation. The project brings together four researchers with complementary methodological skills and empirical expertise to develop new methods of studying technocratic governance. It will cover the full three-decade period since the consolidation of the inflation targeting paradigm in the early 1990s, focusing on three crucial policy areas: monetary policy and financial stability – topics that have long been at the core of central banking but have recently undergone dramatic change in policy – as well as climate change-related policy – an erstwhile taboo topic that many central banks have recently had to engage with. Today, central banks are increasingly drawn into debates over how to address the central challenges of the 21st century, namely inequality and global warming. KNOWLEGPO will study how central banks position themselves in these policy battles, whose outcomes will shape state capacity and the broader macro-financial order for decades to come.

• DFG Programme: Research Grants
• International Connection: France
• Cooperation Partner: Professor Matthias Thiemann, Ph.D.