The hollowing out of monetarism: the rise of rules-based monetary policy-making in the UK and USA and problems with the paradigm change framework

Abstract

The demise of a post-war Keynesian policy paradigm of discretionary fiscal fine-tuning in pursuit of full employment is widely associated with the rise of a monetarist economic policy paradigm stressing fixed policy rules and money supply targets to secure price stability. Challenging these conventional wisdoms, and questioning the usefulness of the paradigm change framework, this article interrogates how far monetarism did replace Keynesian approaches to macroeconomic policy in the UK and USA after the 1970s. Crucial aspects of monetarism—notably the commitment to abandon stabilisation policy and shift to fixed policy rules—were overridden shortly after brief, abortive attempts to use monetarism as a governing doctrine. A paradigm lens overstates the clarity of monetarist ideas, failing to acknowledge how these were reconciled to (New) Keynesian ideas by the end of the 1980s within a pragmatic composite (the Taylor rule). The wider theoretical contribution of this article is to revisit understandings of paradigmatic change in political science and political economy. We argue that taking a paradigmatic view of economic ideas and their relationship policy orders can overstate change, overlook continuities, and overrate the efficiency of punctuated change. It also under-appreciates scope to combine ideas from different paradigmatic homes.

This is a preview of subscription content, log in to check access.

Notes

  1. 1.

    A view we critique below.

References

  1. Alt, J.E. 1991. Leaning into the wind or ducking out of the storm? U.S. monetary policy in the 1980s. In Politics and economics in the eighties, ed. A. Alesina and G. Carliener, 41–82. Chicago: University of Chicago Press.

    Google Scholar 

  2. Argyris, C., and Q.T. Schon. 1994. Organizational Learning. Boston: Addison-Wesley.

    Google Scholar 

  3. Asso, P., and R. Leeson. 2012. Monetary policy rules: From Adam Smith to John Taylor. In The Taylor rule and the transformation of monetary policy, ed. E. Koenig, R.F. Leeson, and G.A. Kahn. Stanford: Hoover Institution Press.

    Google Scholar 

  4. Axilrod, S.H. 2011. Inside the Fed: monetary policy and its management, Martin through Greenspan to Bernanke. Cambridge: MIT Press.

    Google Scholar 

  5. Ball, L. 1999. Efficient rules for monetary policy. International finance 2(1): 63–83.

    Article  Google Scholar 

  6. Batini, N., and Haldane, A. (1998). ‘Forward-looking rules for monetary policy’. Bank of England Working Paper.

  7. Batini, N., and A. Haldane. 1999. Forward-looking rules for monetary policy. In Monetary policy rules, ed. J.B. Taylor, 157–202. Chicago: University of Chicago Press.

    Google Scholar 

  8. Bean, C. 1998. The new UK monetary arrangements: A view from the literature. The Economic Journal 108(451): 1795–1809.

    Article  Google Scholar 

  9. Bell, S. 2011. Do we really need a new ‘constructivist institutionalism’to explain institutional change? British Journal of Political Science 41(4): 883–906.

    Article  Google Scholar 

  10. Bell, S., and H. Feng. 2013. The rise of the people’s bank of China: The politics of institutional change. Cambridge: Harvard University Press.

    Google Scholar 

  11. Bell, S., and H. Feng. 2014. How proximate and ‘meta-institutional’contexts shape institutional change: Explaining the rise of the people’s bank of China. Political Studies 62(1): 197–215.

    Article  Google Scholar 

  12. Bernanke, B.S., and F.S. Mishkin. 1997. Inflation targeting: a new framework for monetary policy? Journal of Economic Perspectives 11(2): 97–116.

    Article  Google Scholar 

  13. Best, J. 2005. The limits of transparency: Ambiguity and the history of international finance. Ithaca: Cornell University Press.

    Google Scholar 

  14. Best, J. 2004. Hollowing out Keynesian norms: How the search for the technical fix undermined the bretton woods regime. Review of International Studies 30: 383–404.

    Article  Google Scholar 

  15. Blanchard, O. J., & Summers, L. H. (1986). Hysteresis in unemployment. European Economic Review 31(1–2): 288–295.

    Google Scholar 

  16. Blinder, A.S. 1988. The challenge of high unemployment. NBER Working Paper No. 2489. NBER Cambridge, MA.

  17. Blinder, A. 2006. Monetary Policy by Committee: Why and How. DNB Working Paper De Nederlandsche Bank Amsterdam The Netherlands.

  18. Blinder, A.S. 2007. Monetary policy by committee: Why and how? European Journal of Political Economy 23(1): 106–123.

    Article  Google Scholar 

  19. Blyth, M. 2002. Great transformations: Economic ideas and institutional change in the twentieth century. Cambridge: Cambridge University Press.

    Google Scholar 

  20. Burnham, P. (1999). The politics of economic management in the 1990s. New Political Economy 4(1): 37–54.

    Article  Google Scholar 

  21. Burnham, P. 2001. New Labour and the politics of depoliticisation. The British Journal of Politics & International Relations 3(2): 127–149.

    Article  Google Scholar 

  22. Burnham, Peter. 2007. The politics of economic management in the 1990s. New Political Economy 4(1):37–54.

    Article  Google Scholar 

  23. Clift, B. 2018a. The IMF and the politics of austerity in the wake of the global financial crisis. Oxford: Oxford University Press.

    Google Scholar 

  24. Clift, B. 2018b. The IMF, the eurozone and global financial crises, and the politics of economic ideas. Comparative European Politics. https://doi.org/10.1057/s41295-018-0146-x.

    Article  Google Scholar 

  25. Clift, B., and J. Tomlinson. 2012. When rules started to rule: The IMF, neo-liberal economic ideas and economic policy change in Britain. Review of International Political Economy 19(3): 477–500.

    Article  Google Scholar 

  26. Colander, D. (1992). New keynesian economics in perspective. Eastern Economic Journal 18(4): 437–448.

    Google Scholar 

  27. Copley, J. 2017. Financial deregulation and the role of statecraft: Lessons from britain’s 1971 competition and credit control measures. New Political Economy 22(6): 692–708.

    Article  Google Scholar 

  28. Crouch, C., and M. Keune. 2005. Making Use of Institutional Diversity in Hungary and the United Kingdom. In Beyond continuity: Institutional change in advanced political economies, ed. Streeck & Therlen, 83–102. Oxford University Press.

  29. Dale, S. 2013a. Inflation and growth: what role for monetary policy?. Speech given by spencer dale, executive director, monetary policy, and Chief Economist, Bank of England to the Asian Business Association and Chinese Business Association of London Chamber of Commerce and Industry, Bank of England, London, 15th March.

  30. Dale, S. 2013b. Limits of monetary policy. The Manchester School 81(S1): 35–47.

    Article  Google Scholar 

  31. De Long, J.B. 2000. The triumph of monetarism? The Journal of Economic Perspectives 14(1): 83–94.

    Article  Google Scholar 

  32. Dutta, S.J. 2018. Sovereign debt management and the globalization of finance: Recasting the City of London’s ‘Big Bang’. Competition and Change 22(1): 3–22.

    Article  Google Scholar 

  33. Elgie, R., and H. Thompson. 1998. The politics of central banks. Abingdon: Routledge.

    Google Scholar 

  34. Fforde, J.S. 1983. Setting monetary objectives. Bank of England Quarterly Bulletin 23(2): 200–208.

    Google Scholar 

  35. Farrell, H., and J. Quiggin. 2017. Consensus, dissensus, and economic ideas: economic crisis and the rise and fall of keynesianism. International Studies Quarterly 61: 269–283.

    Article  Google Scholar 

  36. Fischer, Stanley. 1988. Recent developments in macroeconomics. Economic Journal 98(391): 294–339.

    Article  Google Scholar 

  37. Foot, M.D.K.W., and A. Hotson. 1979. Monetary base control. Bank of England Quarterly Bulletin 19(2): 149–156.

    Google Scholar 

  38. Foot, M.D.K.W. 1981. Monetary targets: their nature and record in the major economies. In Monetary targets, ed. B. Griffiths and G. Wood, 13–61. Basingstoke: Palgrave Macmillan.

    Google Scholar 

  39. Friedman, M. 1953. Essays in positive economics. Chicago: Chicago University Press.

    Google Scholar 

  40. Friedman, M. 1956. The quantity theory of money: A re-statement. In Studies in the quantity theory of money, ed. M. Friedman. Chicago: Chicago University Press.

    Google Scholar 

  41. Friedman, M. 1959. A program for monetary stability. New York: Frodham University Press.

    Google Scholar 

  42. Friedman, M. 1961. The lag in effect of monetary policy. Journal of Political Economy 69(5): 447–466.

    Article  Google Scholar 

  43. Friedman, M. 1968. The role of monetary policy. American Economic Review 58: 1–17.

    Google Scholar 

  44. Friedman, M. 1969. The lag in effect of monetary policy. In The optimum quantity of money, ed. T. Bewley. Chicago: Chicago University Press.

    Google Scholar 

  45. Friedman, M. 1970. The counter-revolution in monetary theory: first Wincott memorial lecture, delivered at the Senate House, University of London, 16 September, 1970 (Vol. 33). Institute of Economic Affairs.

  46. Friedman, M. 1977. Nobel lecture: inflation and unemployment. Journal of Political Economy 85(3): 451–472.

    Article  Google Scholar 

  47. Friedman, M., and A.J. Schwartz. 1982. A monetary history of the United States, 1867–1960. Princeton University Press.

  48. Galbraith, J.K. 1958. The affluent society. Houghton Mifflin Harcourt.

  49. Gamble, A. 1988. The free economy and the strong state: the politics of Thatcherism. Basingstoke: Macmillan.

    Google Scholar 

  50. Gamble, A. 1990. Britain in decline. 3rd ed. Basingstoke: Macmillan.

    Google Scholar 

  51. Gill, Stephen. 1998. European governance and new constitutionalism: Economic and monetary Union and alternatives to disciplinary neoliberalism in Europe. New Political Economy 3(1): 5–26.

    Article  Google Scholar 

  52. Glyn, A., Hughes, A., Lipietz, A., & Singh, A. 1990. The rise and fall of the golden age. In The golden age Of capitalism: Reinterpreting the postwar experience, ed. S.A. Marglin and J.B. Schor, pp. 39–125. Oxford University Press.

  53. Goodhart, C. 1989a. The conduct of monetary policy. The Economic Journal 99(396): 293–346.

    Article  Google Scholar 

  54. Goodhart, C. 1989b. Money, information and uncertainty. 2nd ed. Basingstoke: Macmillan.

    Google Scholar 

  55. Goodhart, C. 1999. Central bankers and uncertainty. Bank of England. Quarterly Bulletin 39(1): 102–114.

    Google Scholar 

  56. Gray, J. 1998. False dawn: The delusions of global capitalism. London: Granta.

    Google Scholar 

  57. Greenspan, A. 1993. Testimony before the subcommittee on economic growth and credit formation of the committee on banking, finance and urban affairs, US house of representatives, July 20. https://fraser.stlouisfed.org/files/docs/historical/greenspan/Greenspan_19930720.pdf.

  58. Haldane, A. 1995. Rules, discretion and the UK’s new monetary framework. London: Bank of England.

    Google Scholar 

  59. Hall, P. 1986. Governing the economy. Cambridge: Polity.

    Google Scholar 

  60. Hall, P. ed. 1989a. Introduction. In The Political Power of Economic Ideas, pp. 3–26. Princeton: Princeton University Press.

  61. Hall, P. 1989b. Conclusion. In The political power of economic ideas, ed. P. Hall, 361–392. Princeton: Princeton University Press.

    Google Scholar 

  62. Hall, P. 1993. Policy paradigms, social learning, and the state: The case of economic policy-making in britain. Comparative Politics 25: 275–296.

    Article  Google Scholar 

  63. Hay, C. 2001. The “Crisis” of Keynesianism and teh rise of neoliberalism in Britain: An ideational institutionalist approach. In The rise of neoliberalism and institutional analysis, ed. Campbell & Pedersen, 193–218. Princeton: Princeton University Press.

    Google Scholar 

  64. Hay, C. 2004. Credibility, competitiveness and the business cycle in ‘third way’ political economy: A critical evaluation of economic policy in Britain since 1997. New Political Economy 9(1): 39–56.

    Article  Google Scholar 

  65. Hoover, K. 1984. Two types of monetarism. Journal of Economic Literature 22: 58–76.

    Google Scholar 

  66. Hoskyns, J. 1981. Hoskyns minute to MT (summary of Niehans Report) [roots of sterling appreciation in overtight monetary policy] The National Archive PREM19/438 f103 (http://www.margaretthatcher.org/document/113989.

  67. Iversen, T. 2000. Decentralization, monetarism, and the social democratic welfare state. In Unions, employers, and central banks. Macroeconomic coordination and institutional change in social market economies, ed. T. Iversen, J. Pontusson, and D. Soskice, 205–231. Cambridge: Cambridge University Press.

    Google Scholar 

  68. Iversen, T., and J. Pontusson. 2000. Comparative political economy: a Northern European perspective. In Unions, employers and central banks: Macroeconomic coordination and institutional change in social market economies, ed. T. Iversen, J. Pontusson, and D. Soskice, 1–37. Cambridge: Cambridge University Press.

    Google Scholar 

  69. Jackson, P. 1992. Economic Policy. In Implementing thatcherite policies: Audit of an era, ed. D. Marsh and R.A. Rhodes. Buckingham: Open University Press.

    Google Scholar 

  70. Johnson, J. 2003. Past dependence or path contingency? Institutional design in postcommunist financial systems. In Capitalism and democracy in central and Eastern Europe: Assessing the legacy of communist rule, ed. G. Ekiert and S.E. Hanson, 289–316. Cambridge: Cambridge University Press.

    Google Scholar 

  71. Kahn, G. 2012. The Taylor rule and the practice of central banking. In The Taylor rule and the transformation of monetary policy, ed. E. Koenig, R.F. Leeson, and G.A. Kahn. Stanford: Hoover Institution Press.

    Google Scholar 

  72. Koenig, E., R.F. Leeson, and G.A. Kahn. 2012. The Taylor rule and the transformation of monetary policy. Stanford: Hoover Institution Press.

    Google Scholar 

  73. King, M.A. 1997a. Changes in UK monetary policy: Rules and discretion in practice. Journal of Monetary Economics 39: 81–97.

    Article  Google Scholar 

  74. King, M. A. 1997b. “The inflation target five years on”, LSE Lecture 29 October https://www.bankofengland.co.uk/-/media/boe/files/speech/1997/the-inflation-target-five-years-on.

  75. King, M. 1999. Challenges for monetary policy: new and old. Bank of England. Quarterly Bulletin 39(4): 397.

    Google Scholar 

  76. King, M., Aikman, D., Barrett, P., Kapadia, S., Proudman, J., Taylor, T.,… & Yates, T. 2010. Uncertainty in macroeconomic policy making: art or science, lecture at a royal society conference in London on 22 March.

  77. Kydland, F., and E. Prescott. 1977. Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 67: 473–491.

    Article  Google Scholar 

  78. Laidler, D. 1981. Monetarism: an interpretation and an assessment. Economic Journal 91: 1–28.

    Article  Google Scholar 

  79. Lawson, N. 1981. ‘Thatcherism In practice A progress report’ speech given by The Rt Hon Nigel Lawson, MP, financial secretary to the treasury, to the Zurich society of economics at the Kongresshaus, Zurich, 14 January 1981. http://www.margaretthatcher.org/document/109506.

  80. Leigh-Pemberton, 1986. Financial change and broad money. Bank of England Quarterly Bulletin 4: 499–507.

    Google Scholar 

  81. Lucas, Robert E., and Thomas J. Sargent. 1979. After Keynesian macroeconomics. Quarterly Review 3(2): 49–72.

    Article  Google Scholar 

  82. Mankiw, N.G. 1988. Recent developments in macroeconomics: a very quick refresher course. Journal of Money, Credit and Banking 20(3): 436–449.

    Article  Google Scholar 

  83. Mahoney, J., and K. Thelen (eds.). 2010. Explaining institutional change: Ambiguity, agency and power. Cambridge: Cambridge University Press.

    Google Scholar 

  84. Mankiw, N.Gregory. 1992. The reincarnation of Keynesian economics. European Economic Review 36: 559–565.

    Article  Google Scholar 

  85. McNamara, K.R. 1998. The currency of ideas: monetary politics in the European Union. Ithaca: Cornell University Press.

    Google Scholar 

  86. Needham, D. 2014. UK monetary policy from devaluation to thatcher, 1967–82. Berlin: Springer.

    Google Scholar 

  87. Nelson, S.C. 2017. The currency of confidence: How economic beliefs shaped the IMF’s relationship with its borrowers. Ithaca: Cornell University Press.

    Google Scholar 

  88. Nelson, S.C., and P.J. Katzenstein. 2014. Uncertainty, risk, and the financial crisis of 2008. International Organization 68(2): 361–392.

    Article  Google Scholar 

  89. Notermans, T. 2000. Money, markets, and the state: social democratic economic policies since 1918. Cambridge University Press.

  90. Palley, T.I. 2005. From Keynesianism to neoliberalism: Shifting paradigms in economics’. In Neoliberalism: A critical reader, ed. S. Alfredo Filho and D. Johnston, 20–29. University of Chicago Press.

  91. Phelps, E. S. 1967. Phillips curves, expectations of inflation and optimal unemployment over time. Economica, 254–281.

  92. Pierson, P. 2000. Increasing returns, path dependence, and the study of politics. American Political Science Review 94(02): 251–267.

    Article  Google Scholar 

  93. Pierson, P. 2004. Politics in Time. Princeton: Princeton University Press.

    Google Scholar 

  94. Romer, David. 1993. The new Keynesian synthesis. Journal of Economic Perspectives 7(1):5–22.

    Article  Google Scholar 

  95. Ryner, M. 1999. Neoliberal globalization and the crisis of Swedish social democracy. Economic and Industrial Democracy 20(1): 39–79.

    Article  Google Scholar 

  96. Sargent, T.J., and N. Wallace. 1975. “Rational” expectations, the optimal monetary instrument, and the optimal money supply rule. Journal of political economy 83(2): 241–254.

    Article  Google Scholar 

  97. Scharpf, F.W. 1991. Crisis and choice in European social democracy. Ithaca: Cornell University Press.

    Google Scholar 

  98. Scott, A., R. Harrison, K. Nikolov, M. Quinn, G. Ramsay, and R. Thomas. 2005. The bank of england quarterly model. London: Bank of England.

    Google Scholar 

  99. Seabrooke, L.S., C. Ban, O. Helgadóttir, E.R. Nilsson, and K. Young. 2015. Embedding group think: Assessing the spread of neo-liberal ideas and influence. Paris: Paper presented to the INET conference.

    Google Scholar 

  100. Smith, D. 1987. The rise and fall of monetarism. London: Penguin books.

    Google Scholar 

  101. Streeck, W., and K. Thelen (eds.). 2005. Beyond continuity: Institutional change in advanced industrial economies. Oxford: Oxford University Press.

    Google Scholar 

  102. Taylor, J.B. 1990. Contribution to council of economic advisers 1990 Economic Report of the President. Washington: US Government Printing Office.

    Google Scholar 

  103. Taylor, J. B. 1993. Discretion versus policy rules in practice. In Carnegie-Rochester conference series on public policy (Vol. 39, pp. 195–214). North-Holland.

  104. Taylor, J.B. 1999. A historical analysis of monetary policy rules. In monetary policy rules, ed. J.B. Taylor, 319–348. Chicago: University of Chicago Press.

    Google Scholar 

  105. Taylor, J.B. (ed.). 2007. Monetary policy rules, vol. 31. Chicago: University of Chicago Press.

    Google Scholar 

  106. Taylor, J.B. 2009. Getting off track: How Government actions and interventions caused, prolonged, and worsened the financial crisis. Stanford, CA: Hoover Institution Press.

    Google Scholar 

  107. Taylor, J.B. 1981. Stabilization, accommodation, and monetary rules. The American Economic Review 71(2): 145–149.

    Google Scholar 

  108. Thompson, G. 1990. The political economy of the new right. London: Pinter.

    Google Scholar 

  109. Vickers, J. 1998. Inflation targeting in practice: The UK experience’. Bank of England. Quarterly Bulletin 38(4): 368.

    Google Scholar 

  110. Volcker, P. 1992. Taking on Inflation. In Changing fortunes: The world’s money and the threat to American leadership, ed. P.A. Volcker and T. Gyohten, 163–186. New York: Times Books.

    Google Scholar 

  111. Watson, M. 2004. Endogenous growth theory: Explanation or Post Hoc rationalisation for policy? British Journal of Politics and International Relations 6 (2): 543–551.

    Article  Google Scholar 

  112. Weaver, C. 2008. Hypocrisy trap: The World Bank and the poverty of reform. Princeton: Princeton University Press.

    Google Scholar 

  113. Widmaier, W. 2016. Economic ideas in political time. Cambridge: Cambridge University Press.

    Google Scholar 

  114. Woodford, M. 2001. The Taylor rule and optimal monetary policy. The American Economic Review 91(2): 232–237.

    Article  Google Scholar 

Download references

Acknowledgements

The author would like to thank Wes Widmaier in particular for rewarding research collaboration and fruitful discussion which proved enlightening on numerous themes dealt with in this paper. He would also like to thank (in no particular order) Matthew Watson, Benjamin Braun, Jack Copley and Jim Tomlinson for insightful and constructive comments on an earlier version of this paper. He would in addition like to thank participants in the panel ‘Understanding change in advanced economy macroeconomic policy thinking since the GFC: a politics of economic ideas approach’ at ISA in Baltimore, 2017, and at the Department of Politics and International Studies at the University of Warwick’s Annual Research Conference 2017 for helpful comments on and insights into an earlier version of this paper. Thanks go to two anonymous referees for thorough and constructive critical engagement with the paper which helped refine the argument and its central claims. Ben Clift is grateful to the Department of Politics and International Studies at the University of Warwick for granting the study leave which enabled some of this research to be undertaken. Finally, he gratefully acknowledges the support of the Leverhulme Trust Major Research Fellowship (MRF-2017-063) which facilitated the final phase of completion of this manuscript.

Author information

Affiliations

Authors

Corresponding author

Correspondence to Ben Clift.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Clift, B. The hollowing out of monetarism: the rise of rules-based monetary policy-making in the UK and USA and problems with the paradigm change framework. Comp Eur Polit 18, 281–308 (2020). https://doi.org/10.1057/s41295-019-00186-1

Download citation

Keywords

  • Monetarism
  • Keynesianism
  • Paradigm change
  • Political economy
  • Economic policy
  • Constructivism
  • Historical institutionalism