Reimagining monetary policy as a federal project

Informations projet

FEDMONEY

N° de convention de subvention: 101075410

DOI

10.3030/101075410

Date de signature de la CE 22 Février 2023

Date de début 1 Septembre 2023

Date de fin 31 Août 2028

Financé au titre de

• European Research Council (ERC)

Coût total

€ 1 499 199,32

Contribution de l’UE

€ 1 499 199,00

Coordonné par

FONDATION NATIONALE DES SCIENCES POLITIQUES
France

Periodic Reporting for period 1 - FEDMONEY (Reimagining monetary policy as a federal project)

Période du rapport: 2023-09-01 au 2026-02-28

Résumé du contexte et des objectifs généraux du projet

Central banks are key institutions of nation states and at times, as in the euro area, of supranational political communities. The world over, they define monetary policy for their entire jurisdiction by setting a key interest rate. This is problematic to the extent that this mode of operation glosses over the economic divergences between regions that often characterize economies -- a phenomenon sometimes dubbed the "one size fits all" problem. In large jurisdictions, the optimal monetary policy on average tends to be suboptimal for economically heterogeneous regions.

The FEDMONEY project analyses whether central banks could be reimagined along federal lines in order to remedy this problem. Outside of the realm of monetary policy, federalist modes of governance indeed allow decentralized political communities to make decisions that better suit local preferences. It is curious that monetary federalism has not been studied to the extent that it is not uncommon for central banks to be structured along federalist principles: split into central headquarters and decentralized branches. Yet even in those cases monetary policy is typically determined centrally and uniformly across the whole of the jurisdiction.

FEDMONEY’s research hypothesis is that it is desirable to federalize monetary policy by taking advantage of federal central banking structures to modulate monetary policy differently across economically heterogeneous regions. Its central aim is to develop a systematic legal and economic analysis of monetary federalism. FEDMONEY explores the legal history of monetary federalism in the United States and Europe. It will contextualize that history in light of constitutional theories of federalism in both jurisdictions, as well as the political economy of central banks. It seeks, in particular, to uncover how central bank cooperation is governed: how decentralized central banks organize their decision-making processes and how their profits and losses are distributed within the system. It will also examine what monetary policy tools central banks dispose of to address regional inequalities.

FEDMONEY hopes thereby to reimagine an alternative governance model for central banks, more attuned to regional inequalities and political authorities.

Travail effectué depuis le début du projet jusqu’à la fin de la période considérée dans le rapport et principaux résultats atteints jusqu’à présent

Our research so far has mainly explored the origins, operation and demise of the most significant historical example of monetary federalism: the early Federal Reserve, which decentralized monetary policy decision-making to the Federal Reserve Bank prior to 1935. We have examined the political origins at the origin of the decision to decentralize monetary policy decision-making, the result of political entrepreneurship seeking a middle ground between a purely centralized system and a system in which monetary policy would be fully decentralized, shielded from the powerful influence of Wall Street. Our research explores how the system was governed, and in particular to what legal and distributive struggles it gave rise between centralized and decentralized authorities in the system. A significant question are the ways in which central banks share or do not share losses -- a theoretical question transcends the specific scenario of the early Federal Reserve. Finally, the FEDMONEY team is exploring how these struggles ultimately led to the centralisation of monetary policy decision-making of the Federal Reserve System during the 1930s.

The project is also beginning to explore the institutional dynamics of monetary governance in the European monetary space before the adoption of the euro. The fact that a multiplicity of nation states decided to limit the fluctuations between their currencies implied that central banks were subject to similar dynamics as the early Federal Reserve: their decision-making required coordination and raised questions as to the ways in which the economic impact of their respective decisions could be shared equitably. The project also examines the different monetary policy tools available to central banks in this multi-currency environment, as opposed to the US dollar environment of the early Federal Reserve.

A third area of our research relates to the monetary policy toolkit of central banks and the way in which these institutions influence dynamics of regional inequality within central bank jurisdictions. The "one size fits all" problem refers to the fact that monetary policy exacerbates inequality between these regions. Our research examines the specific mechanisms through which this occurs. Simultaneously, the project seeks to explore what tools central banks have to mitigate these dynamics. A significant historical reference point are the tools used by central banks before the turn to the short-term interest rate which today appears as the quasi-universal instrument of central banks worldwide. In the post-war period, in particular, central banks made use of a far broader and richer array of monetary policy instruments, sometimes with the explicit aim to respond to dynamics of regional inequality. Our research seeks to uncover what tools central banks can deploy to this end.

Progrès au-delà de l’état des connaissances et impact potentiel prévu (y compris l’impact socio-économique et les conséquences sociétales plus larges du projet jusqu’à présent)

The project has so far achieved three results beyond the state of the art.

First, the project has developed the first systematic analysis of the origins of the idea of the decentralization of monetary policy-making within the same currency area at the time of the creation of the Federal Reserve in 1913 as a result of political entrepreneurship. While some actors lobbied for a nation-wide, centralized central bank, others pleaded for a complete form of decentralization in order to shield the central bank from the dominant influence of Wall Street. The Federal Reserve was ultimately the result of accidental innovation in which monetary policy-making was intended to be largely decentralized, while supervision of the operations of the Federal Reserve was subject to centralized oversight.

A second result beyond the state of the art is the exploration of the legal and jurisdictional struggles behind the operation of the early Federal Reserve. The Federal Reserve Act was ambiguous in many respects, and the actors of the Federal Reserve system made various jurisdictional claims -- some advocating full decentralization, others claiming that the central bank of New York was legitimate in taking a leading role in the system, others still claiming that the Federal Reserve Board held ultimate authority to define the monetary policy stance of all Federal Reserve members. The project also explores how these multiple conflicts over central bank jurisdiction ultimately prompted centralisation of monetary policy decision-making.

A third significant result explores the dynamics of risk sharing between central banks within the Eurosystem. The Eurosystem is often conceived of as a unitary whole, but monetary policy operations are mostly executed by national central banks operating within the context of the Eurosystem, on their own risk. This makes rules on loss sharing, when those losses emerge, critical to understand how the Eurosystem can operate effectively. 'Struggling over Risk. Solidarity and Responsibility in the Eurosystem' argues that loss sharing rules within the Euro area are unclear, subject to significant disagreement, and that distributive conflicts over specific monetary policy programmes often occur within the Eurosystem.