Growth models and central banking: dominant coalitions, organizational sense-making, and conservative policy innovations at the Bundesbank and Fed

Abstract This article revives the comparative political economy of central banking. Drawing on growth models theory, I argue that export-led and debt-led growth models imply fundamentally different versions of central banking and rely on different combinations of monetary, financial, and exchange-rate policies. Historical institutionalists plausibly argue that central banks have learned to pursue these policies because dominant coalitions have shaped central banks’ institutional roles. But since the 1970s, policy activism has become more important. To explain why the Bundesbank and Federal Reserve have come to support the German and US growth models during Post-Fordism, I look at how sense-making processes informed policy innovations. In the German case, the Buba carved out a powerful disciplining role for itself in corporatist coordination, which aligned with the demand-restraining features of Germany’s export-led model; corporate profit expectations signaled economic health. A dilemma arose with deteriorating price competitiveness that the Buba resolved by imposing an export version of secular stagnation. In the US case, Paul Volcker’s aggressive interest rate hikes to eliminate ‘inflation scares’ ushered in an area in which monetary policy became focused on bond market credibility. Greenspan consolidated central banking for financialization by hardening the Fed’s bail-out promise and its focus on ‘wealth effects’.


Introduction
In the past decades, social scientists have emphasized convergence processes in central banking.In a period of reduced inflation and output volatility, structuralists CONTACT Leon Wansleben lw@mpifg.deMax Planck Institute for the Study of Societies, Paulstr.3, Cologne, D-50676, Germany.
Supplemental data for this article is available online at https://doi.org/10.1080/09692290.2023.2175710This article has been corrected with minor changes.These changes do not impact the academic content of the article.aggregate demand.At the same time, the competitive dynamics of finance in such growth models push toward marketization, raising the central bank's importance as coordinator and securer of interlocked, unstable money and capital markets.The tension here is between supporting expansionary debt and asset market dynamics while installing stability-beliefs and insurance mechanisms in the system that keep the risks of financialized growth under control.
To move beyond a purely functionalist perspective on the growth model imperatives for central banking, the paper then asks how actual monetary institutions and policies come to play their distinctive, contextual roles.Drawing on the producer groups literature (Swenson, 1991), Baccaro et al. have addressed this question so far by arguing that growth models are backed by elites with coherent ideas, who push for, and help orchestrate, the kinds of economic policies that reproduce their own, structurally dominant positions (Baccaro et al., 2022;Baccaro & Pontusson, 2019).However, in the case of central banks, this argument leaves open how coalitions affect these actors' behaviors as relatively autonomous organizations.A plausible, historical institutionalist answer to this question is to argue that dominant coalitions shape the institutional identities of central banks in formative periods and thereby establish laws, informal rules, and points of access that privilege their own interests over those of others (Goodman, 1992;Maxfield, 1991).My own paper extends this argument by looking at patterns of organizational sense-making (Weick, 1995).These have become particularly important in the post-1970 period as central banks had to resolve complex policy and legitimacy problems amidst disruptive changes (Abolafia, 2020).Accordingly, organizational sense-making in this period became a key resource for finding policy solutions that re-positioned central banking vis-a-vis structural pressures within different growth models.Such sensemaking reflected particular ways to look at economic causalities, particular filters to select information on economic actors, and particular perceptions of which policy options are available to authorities.As they got to critical junctures, central bankers relied on such sense-making patterns with the result of conservative policy innovations that protected as much as possible the perceived structural context and their own institutional role within it.
My paper demonstrates this empirically by analyzing how the Bundesbank's (Buba) and the Federal Reserve's (Fed) policies became embedded in the respective Post-Fordist growth models of Germany and the United States, especially in the period from 1970 until the late 1990s.Drawing on my own archival and interviewbased research, historical accounts, and a systematic appraisal of the central banks' regular economic reports, I show that central banking looked fundamentally different in these two settings.
After embedding its institutional identity into the highly successful German 'undervaluation regime' (H€ opner, 2019) of the immediate post-war period, the Bundesbank introduced practical monetarism in the wake of Bretton Woods' collapse to re-invigorate its disciplining role vis-a-vis wage bargainers and fiscal authorities.Disinflation was the clear priority but economic health was gleaned from the revenues and profit expectations in the export sector.However, it soon became apparent that under flexible exchange rates, Germany's low inflation raised the country's attractiveness for foreign capital and thus induced an appreciation of the Deutsche Mark (DM), causing problems for exports.The Buba reacted to this dilemma with temporary expansionary measures.Eventually, though, the central bank reinforced its general deflationary bias to reconfirm a particular institutional identity within the broader structural context.The result was an economy that failed to undergo internal re-balancing.Instead, a continued emphasis on demand restraint led to a consolidation of Germany's export reliance, now combined with stagnation and high levels of unemployment (Boix, 2015).Only European monetary integration 'resolved' the dysfunctions of this stagnant macroeconomic model by re-establishing the conditions for German undervaluation in the context of the euro.
By contrast, the Fed, from its inception, was more focused on financial stability and the dangers of credit crunches for the American economy.This led to contradictory policy imperatives in the 1970s, when some parts of finance demanded an end to inflation, while others were threatened by the prospects of significantly higher interest rates.Eventually, Paul Volcker resolved this dilemma in favor of the market-based segments and at considerable macroeconomic costs, thereby establishing new foundations for a debt-and consumption-led growth model organized through securitization, shadow banking, and money market intermediation.The Greenspan-Fed consolidated the role of monetary policy in this larger setting by routinizing expectational coordination with markets.Moreover, monetary and financial policies became increasingly integrated through the Fed's liquidity support operations and attempts to induce 'wealth-effects' amongst households as key sources of aggregate demand.
The paper proceeds as follows.In the next section, I will discuss in more detail the distinctive demands on central banking raised by export-and debt-and consumption-led growth models.I will also detail my perspective on how central banks assume their embedded roles.The two empirical sections then demonstrate how the Buba and Fed, coming from different institutional origins and facing different policy dilemmas, observed the respective economies from different vantage points, focused on different risks, and adopted different policy solutions, reinforcing the countries' respective growth models.Lastly, in the Discussion section, I compare the two cases and sketch ideas for extending this type of analysis to other cases and the contemporary situation.

Growth models and comparative central banking
Thirty years ago, Gerald Epstein (1992) suggested a broader CPE framework for making sense of differences in central banking across advanced capitalist economies.His focus was on the classic growth/employment-inflation trade-off.Epstein argued that the relationships between firms and workers on the one hand, and firms and financiers on the other, influence how central banks manage these tradeoffs, with CBI operating as an interacting variable.On this basis, he sketched four types of economies, reflecting either adversarial or cooperative relations between firms, workers, and financiers.With this theory, Epstein opened up an important field of investigation.Unfortunately, some of his key assumptions did not hold.For instance, Epstein wrongly expected that firms in 'capitalist' settings like Germany rely on unemployment to achieve wage restraint.But theoretical arguments by varieties of capitalism (VoC) scholars as well as historical experiences have made clear that corporatist institutions are decisive for organizing wage restraint, even under full employment conditions.Moreover, while Epstein assumed that financial globalization would entail a universal shift to 'hard money', we have seen in recent decades that the most financialized economies have led the way to ultra-expansionary policies.Braun (2022) plausibly explains this by arguing that the dominant actors in market-based finance, particularly asset managers, are more interested in booming stock and smoothly functioning funding markets than tight money (see also Petrou, 2021).
The VoC literature has made another key contribution to the CPE of central banking by arguing that the costs of disinflation differ for countries with or without coordinated (e.g.centralized) wage bargaining procedures.In countries with these institutions, wage setters can anticipate and incorporate the expected employment effects of their settlements in light of central banks' policy signals; in the absence of wage setting coordination, economies experience more painful disinflations (Hall & Franzese, 1998).More generally, wage restraint is easier to organize with corporatist institutions (Hanck e, 2013).While VoC thus reveals a crucial institutional source of variation, critics have argued that it adopts a New Keynesian model that neglects the distributional implications of monetary policy and its effects on growth (Baccaro et al., 2022).We thus need to go beyond issues of coordination to understand the politics of central banking in different contexts.Frieden (2002) recenters distributional aspects with a focus on nominal exchange rates.His argument is that, as policy makers decide between exchange rate stability or competitive nominal devaluations in a context of fixed but adjustable exchange rates, much depends on the weight of two different kinds of producers.Producers of highly price sensitive, unsophisticated tradable goods sold on domestic or foreign markets favor nominal devaluations to improve their competitiveness, while producers engaged in high quality manufacturing require stability and thus favor unadjusted pegs with key trading partners.This argument is of high relevance to the export-led growth model discussed below, but it neglects domestic central banking issues.Relatedly, by concentrating on nominal exchange policies, Frieden ignores the possibility of competitive real devaluation within a stable exchange rate regime.
This article advances the CPE of central banking by drawing explicitly on the growth model literature.The paper particularly connects to recent attempts to rethink the politics of growth models.In this vein, scholars have shown how tax (Haffert & Mertens, 2021) and spending policies (H€ ubscher et al., 2022), foreign exchange management (H€ opner, 2019), and regulatory/credit policies (Reisenbichler & Wiedemann, 2022) reflect dominant interests in different growth model settings.As part of this research strand, Reisenbichler (2020) discusses central bank policies.Concentrating on the QE period, he shows that the Fed targeted housing and associated financial markets through its QE interventions to revive a particular growth model reliant on the respective markets and sectors, while housing played little to no role in the European Central Bank's (ECB) policy choices after 2008, reflecting a situation of 'nationally fragmented, less-developed housing finance markets' in the eurozone (ibid, 2).
My aim here is to provide a more comprehensive conceptualization of this linkage between central banking and growth models.I start off with formulating expectations about the ideal typical versions of central banking that different models entail, concentrating on export-led and debt-and consumption-led regimes.The ideal types have the primary function to work out expected differences in institutions and policies between contexts.As part of this exercise, I look at different dimensions of central banking-monetary and macroeconomic policy, foreign exchange management, and financial/regulatory policy-as interdependent choices that are related to institutions in the broader polity/economy.For instance, the well-known trilemma suggests that exchange rate pegs and capital controls shape the opportunity sets for macroeconomic and monetary policy.For small economies with high trade shares, exchange rate pegs without capital controls raise serious stability problems if monetary policies differ from those of significant trading partners.Going beyond this, I incorporate VoC's insights on the influence of wage bargaining institutions on policy options and effects.In the presence of such institutions, central banks understand their roles as disciplining authorities over the wage setting process, a role that is not available for authorities in more liberal/adversarial labor market settings.Moreover, as Braun (2020) has convincingly argued, there exists an important infrastructural linkage between monetary and financial policy.Since central bank policy is implemented and transmitted via financial systems, different versions of monetary policy are made possible by certain financial sector configurations, which in turn depend on distinct regimes of regulation.Finally, I assume that any policy fix to the problems of Post-Fordist growth models raises its own dilemmas.This is particularly so because none of the available fixes eliminates the fundamental predicament, which is the deficiency of wage-financed aggregate demand at stable prices, in external equilibrium.The unsustainable nature of Post-Fordist growth models thus comes to haunt central bankers through various feedback mechanisms (Blyth & Matthijs, 2017;Pierson, 1993).
Let us start with export-led growth.My focus here is on countries with 'diversified quality production' (Sorge & Streeck, 2018) that export manufactured goods (and associated services).For these countries, certain strategies that can boost export competitiveness, like drastic unilateral devaluations, are not available because these measures would be inconsistent with the requisite stability supporting complex trade relationships, and that are necessary to establish domestic conditions (primarily industrial peace) that underpin a highly productive export industry.Central banks can support export competitiveness in this situation through a distinct combination of monetary and exchange rate policies.For instance, with the existence of internationally agreed fixed exchange rates, a viable strategy is to pursue monetary policies that maintain inflation rates below those of trading partners.This establishes an 'undervaluation regime' (H€ opner, 2019), which is maintained with support of strong productivity growth, wage restraining labor institutions, and conservative fiscal policies.The caveat is that, as the domestic currency becomes undervalued on international markets, this undermines the stability of the fixed exchange rate regime.In the expectation of revaluations, capital inflows can unleash domestic inflation and put pressure on the peg.External monetary and financial pressures may thus threaten the preferred option of an undervalued, fixed exchange rate plus domestic restraint.Under flexible exchange rates, the problem is that the domestic currency is likely to appreciate in light of positive inflation differentials, undoing the undervaluation advantage.The central bank, under these conditions, is in a dilemma.If it decides to maintain low inflation despite the exchange rate adjustments, it likely contributes to economic stagnation; the export sector can only survive by reducing domestic costs and employment (e.g. through outsourcing) while alternative sources of demand remain repressed (Goldberg & Knetter, 1997).Such anti-growth central bank policy thus avoids the reflationary dynamics that would undo the economy's export-bias, but does so at considerable macroeconomic damage.Financial policies complement export-supportive monetary and exchange rate policies.They consist in encouraging domestic saving, inhibiting expansions of consumer debt, discouraging large foreign capital inflows, and avoiding volatility in corporate funding costs.This combination of monetary with financial policies can be facilitated, for instance, through regulations that privilege domestic universal banking at the expense of international, non-bank players.
In debt-and consumption-led regimes, central banking assumes a very different function.As domestic household consumption is the key component of aggregate demand, central banks are likely to act in a more Keynesian role.However, because such demand is debt-financed and/or dependent on asset market developments, central banks are not primarily facilitators of classic fiscal Keynesianism; the key mechanism is not via higher demand for investment goods and expansions of capacity utilization that lead to rising real wages, boosting consumption.Rather, central banks are critical for ensuring access to affordable debt and maintaining booming asset markets (primarily real estate) on the demand-side, while supporting elastic credit (inside money creation) and upholding positive financial return expectations on the supply-side.Low and stable inflation facilitates this by giving confidence to dynamically expanding markets; and such price stability can be maintained despite easy money as long as debt-based consumption does not spill over into domestic labor markets.Since expanding debt presupposes dynamic competition within the financial sector, it is likely that debt-and consumption-based models have market-based financial systems, which means that central bankers need to reach the wider systemrather than just member banks -with liquidity provision and confidence signals.More generally, since credit and asset market booms are fragile, and since marketbased financial systems entail various mechanisms to amplify crisis dynamics, the central bank's role as financial stabilizer is much more pronounced than in exportled regimes.In sum, then, the key challenges for the respective central bank are to keep credit and asset market booms running without risking too devastating reverse movements (Schularick & Taylor, 2012), and to balance the private consumptionwith the financial profit-imperatives of the regime.
The core idea thus is that particular versions of central banking keep growth models on their trajectories, despite various dilemmas and internal tensions that are inherent to such policies.However, functionality, from a growth model perspective, does not yet explain the causes for institutional configurations and policy choices (Elster, 2015).So how do we go about answering the question of alignment between institutions, policies and growth models?Both Epstein's (1992) 'contested terrain' concept as well as the notion of 'dominant growth coalitions' (Baccaro et al., 2022) suggest that actors with shared economic interests coalesce in broader political alliances (sometimes across class-boundaries) to dominate politics and policy-making.While this is a plausible argument, it is important to recognize that central banks constitute relatively autonomous organizations and, especially in the Post-Fordist period, have demonstrated a degree of (sometimes highly innovative) policy activism that is hard to explain with coalition politics alone.
What, then, explains central banks' organizational behavior, especially when they face crises?Historical institutionalists have argued that central banks' institutional identities are shaped by the very coalitions that are dominant during formative periods (Goodman, 1992;Maxfield, 1991).These coalitions manage to write rules and laws that advantage them over others and to secure privileged access to decision makers through various formal and informal means.This then 'biases' central banking in favor of already dominant, privileged constituencies.Central bankers themselves often find reasons to stick to their privileged constituencies, for instance because these groups support authorities in the political arena, have structural power over relevant policy outcomes, and/or because they provide means that are relevant in the process of policy implementation (Braun, 2020).This suggests that central bankers, even in difficult circumstances, resettle in their existing niches rather than transitioning to fundamentally different roles to support a shift in growth models.
My own analysis builds on this historical institutionalist insight, and complements it with a focus on sense-making as part of central banks' role formation and reinvention.Any organization needs to actively make sense of its environment to establish its own role and take decisions (Weick, 1995).But particularly with the Great Inflation of the 1970s, observing and understanding monetary, economic, and financial developments, and using such information for pro-active policy conduct, became critical for legitimacy purposes and as a resource to solve practical policy problems (Abolafia, 2012).Building on this idea, I aim to show that central bankers' contextual sense-making provided the basis for conservative innovations in light of Post-Fordist developments.The way this worked was that central bankers developed and acted upon crisis diagnoses that related selective attention for particular developments and contextually specific notions of economic causalities to self-understandings of their own roles as monetary authorities.Since central bankers had formed these sense-making patterns in particular growth model contexts, they employed understandings of monetary stability and economic prosperity that were informed by such models, even as situations changed and new dilemmas arose.As part of this selective sense-making, central bankers were particularly attentive to the signals from dominant groups in extant models since these were perceived as constituencies, who were decisive in achieving desirable macroeconomic outcomes (Bell & Hindmoor, 2014).We know from a broad literature that expectations matter for monetary policy makers (Barro & Gordon, 1983;Braun, 2015;Holmes, 2013;Kydland & Prescott, 1977;Nelson & Katzenstein, 2014;Woodford, 2003), and my focus here is on expectations as channels to provide information on the demands/needs of dominant groups.Through learnt ways to read the economy, central bankers in different growth models arguably give priority to expectational 'signals' (Winters, 1994, p. 431) from different groups.However, reacting to such signals is not always straightforward and depends on the perceived policy options available at particular junctures.This is why I conceptualize the policy making process in terms of conservative innovations-problem solving strategies through which central banks try to reproduce as much of the perceived growth model and their own institutional self-understanding as is possible.
The next section specifies how I aim to investigate institutional identity-formation and related sense-making patterns at specific central banks.I then turn to Germany and the United States as two settings, in which the differences in growth models and central banks' embedded roles can be gleaned particularly clearly.

Methods and data
In the subsequent analysis, Germany and the United States serve as contrasting cases that represent juxtaposed examples for export-led versus debt-led growth (see e.g.Epstein, 1992;Johnson, 1998: for productive uses of this comparison).The basis of this analysis is a multi-year comparative project, which involved research in central bank archives, oral history interviews with (former) officials, and a comprehensive review of secondary sources.For this paper, I use key secondary sources as well as transcripts from the central banks' key decision making bodies -the Zentralbankrat (literal translation: 'Central Bank Council') for the Bundesbank and the Federal Open Market Committee (FOMC) for the Fed.Most of the analysis concentrates on critical episodes (the Volcker shock; periods of DM appreciation) to explore to what extent central bankers made sense of the economy in ways that gave privilege to certain sectoral interests and entailed particular self-understandings that guided their problem-solving strategies.
As another piece of evidence, I systematically analyze the central banks' regular economic reports published between 1975-1999 to identify how experts in the two central banks observed the economy.The rationale behind this is that such reports document one crucial, routinized practice of sense-making with significant influence on policy decisions (Abolafia, 2020;Fligstein et al., 2017;Golubet al., 2015).
To reduce reports to manageable information, I concentrate on the question of which groups' expectations receive most attention.I hand-coded an 'expectation theme' in a report whenever the expectations of one among six different groups (financial markets; producers; consumers; workers; political actors; other) were explicitly mentioned in the written part of the report (rather than just counting word occurrences).This helped me to assess the relative weight of the respective groups in central bankers' understandings of the economy.I document the coding process in the Appendix.
The Bundesbank: monetary policy for export-led growth The Bundesbank's foundation in 1957 falls squarely in the period of Germany's Wirtschaftswunder.After recovery from the enormous shock around 1945 and the 1948-currency reform, the German economy grew at an average 8 per cent per annum throughout the 1950s (Eichengreen & Ritschl, 2009).Exports were the main driver of this exceptional economic expansion, starting their rise from less than 10 per cent in 1949 to around 25 per cent of domestic production by 1970 (Lindlar & Holtfrerich, 1997).Particularly in the early 1950s, monetary and exchange rate policies supported this rapid take-off.The Bank deutscher L€ ander, still in charge at this point, maintained exceptionally low levels of inflation and accumulated West Germany's first foreign reserves in what became an 'undervaluation regime', with the real effective exchange rates depreciating relative to trading partners (Germann, 2021, p. 59;H€ opner, 2019).The Bundesbank effectively inscribed its own institutional identity into this emergent post-war export-led boom by maintaining a high level of continuity with the Bank deutscher L€ ander and by emphasizing the economic and democratic virtues of stable money.As part of this institution building, top Bundesbank officials (often former Reichsbank personnel) claimed that the Nazi regime had demonstrated the dangers of inflationary policies and political influence over central banking, warranting strong de facto independence and a particular emphasis on price stability (Mee, 2019). 1  However, for all the Bundesbank's emphasis on its 'monetary guardianship', the primary task in the 1960s became to defend Germany's undervalued exchange rate.
Accordingly, the central bank's constitutional mandate for preserving 'the stability of the currency' was primarily understood as relating to the exchange rate.Karl Blessing, the Buba's first president 'believed that a fixed exchange rate was a matter of noli me tangeni-it was untouchable' (Johnson, 1998, p. 76).In some ways, these views reflected an alignment with the government's position, which was under strong influence from the export industry.However, evidence suggests that Bundesbankers embraced exchange rate stability not just tactically but also because there existed a strong internal group in its support.These were officials with ties to Germany's large banks (Dresdner, Deutsche, Commerzbank), whose representatives were effective and vocal spokespersons for exchange rate stability.The large banks were in favor of undervaluation because they held very close ownership-, personnel-, and credit-ties to the large export-sector corporations; for instance, Herrmann Abs, Deutsche Bank's CEO, gave 'consistent advice [to the Bundesbank, lw] to favor export performance even at the risk of greater inflation' (ibid, 53).
Under these conditions, the export sector continued its growth path in the 1960s to achieve a contribution of 20 percent of all manufactured goods on international markets by 1970, more than the United States.However, in that decade, the undervaluation regime increasingly revealed its limits and inherent tensions.In a situation of tight labor markets, full capacity utilization, and domestic demand pressure from a growing population, the inflowing capital from countries with higher inflation rates and devaluation risks triggered a domestic inflationary spiral, motivating increasingly militant industrial action (including unheard-of wildcat strikes).Since fiscal policy had increasingly become Keynesian in the late 1960s (partly motivated by the government's success in fighting the 1967-recession), the onus fell on the Bundesbank to resolve this dilemma (von Hagen, 1999).A new faction in the Bundesbank formed around Otmar Emminger and Helmut Schlesinger, who wanted to end DM's undervaluation to address domestic inflation with monetarist means.The constituency to support this faction, with strong central banking ties, were the Sparkassen, which saw inflation as a threat to their increasingly large business in managing middle class savings.
Ultimately, international crisis conditions and contingent bureaucratic politics gave the Emminger-Schlesinger faction a window of opportunity to push for floating exchange rates and start the project of tackling domestic inflation.After the sudden move to flexible exchange rates in 1973, the Bundesbank adopted explicit monetary targeting at the end of 1974, signaling to key constituencies its anti-inflationary intentions: There would be no accommodation of high wages or expansionary fiscal policy and inflation would be conquered, if necessary, by letting unemployment increase (Goodman, 1992, p. 101;James, 2012, pp. 180-182;Scharpf, 1987, p. 101).This message stuck and trade unions began to listen to the Bundesbank's messages, if only to avoid higher unemployment.What then developed as domestic monetary policy is best described as 'incomes policy in disguise' (cited in Johnson, 1998, p. 94).By repeatedly threatening unilateral moves towards hard money, the central bank asked corporatist partners to practice 'cooperation' in order to avoid 'detrimental effects' (cited in Clarida & Gertler, 1997, p. 368) for employment and growth (Franzese, 2000, pp. 100-101;Scharpf, 1987) within the central bank-imposed low inflation regime. 2  Complementing this labor cost and fiscal spending-focused monetarism was a rather restrictive financial sector politics that prevented the disintermediation processes happening elsewhere.For instance, through informal agreements, the Bundesbank and banks maintained a ban on short-term funding instruments or loans with variable interest rates; the Bundesbank's onerous reserve requirements additionally rendered practices such as active liability management unattractive.The central bankers' interest in protecting universal banking derived from their monetarism, which required predictable reserve management behavior amongst the banks and stable relationships between interest rate decisions and bank lending.The banks, in turn, supported this rather restrictive regulatory environment because it provided a shield against foreign or non-bank competition.As a Bank of England official remarked after a visit to Germany, '[t]he banks find the present cosy relationship amongst themselves and with the authorities very congenial.In turn, the Bundesbank sees no reason to stir up a situation which is relatively easy to control'. 3 However, notwithstanding the monetarist success and its anchorage in older traditions of corporatist wage coordination, conservative fiscal policy, and banking regulation, the Bundesbank in the post-1973 period faced a new dilemma.This arose from the dissolution of the undervaluation regime.As the German mark continued to appreciate throughout the 1970s, this helped with disinflation (by making imports cheaper) but posed serious problems to the tradable goods sector.Despite their hardening commitment to monetarism, German central bankers were all but indifferent to these challenges to the country's dominant export companies.Indeed, evidence from its economic reports suggests that the Bundesbank cared significantly more about the revenue and profit prospects of these companies than the mounting unemployment problem or weak demand (Figure 1).
In the meetings of the Buba's Zentralbankrat, these concerns surfaced during several critical periods.For instance, during the late 1970s, the US dollar depreciated strongly against the Deutsche Mark, further threatening the international competitiveness of German goods.On 15th December 1977, Bundesbank President Otmar Emminger noted in a meeting that the exchange rate developments would contribute to a deterioration of corporate earnings and would adversely affect investments and employment at home.Based on these considerations, the Bundesbank decided to lower its policy rates.Throughout 1978, these export-sector concerns arising from harmful exchange rate developments received due attention, which led the Bundesbank to tolerate a strong overshooting of its monetary target (actual monetary growth was 11 instead of targeted 8 per cent) in order to give room for accommodative interest rate changes and regular foreign exchange interventions.Tellingly, during their meeting on March 16th 1978, the central bankers abstained from further easing because at that point, wage negotiations were ongoing; officials wanted to avoid the impression amongst trade unions that there was room for wage hikes.Moreover, after the Reagan shock, and amid DM devaluation, the Bundesbank 'pursued a more restrictive monetary policy than would have been necessary if it had been oriented exclusively to domestic requirements' (Kitterer, 1999, p. 191), in effect using the easing of pressure on exports to double down on inflation.But the Buba again became more expansionary than was consistent with its objectives in the period 1986-1987, again due to the foreign exchange developments and their implications for exports.As members of the Zentralbankrat noted during this period, it 'is imperative to avoid a further deterioration of the American currency because this will affect the competitiveness of German exporters and impede their investment activity at home'. 4  However, as monetary economists have noted repeatedly, unilateral exchange rate interventions or even the rather unstable European exchange rate agreements of the 1970s (requiring regular realignments) could only achieve very little.Provisional fixes to exchange rate troubles could not resolve the dilemma confronted by the Bundesbank, which was that any attempt to lower the DM value with large FX interventions and looser monetary policy would give impetus to domestic inflation-a policy course that the Buba saw as inconsistent with its monetarist institutional identity, and with its focus on wage and fiscal restraint as pillars of the German economic regime.Accordingly, the Bundesbank in the 1980s reinforced its hard money stance.The consequence was that a resilient core of competitive export industries (particularly in electronics, chemical, and automotive industries) consolidated, but at higher levels of unemployment and lower growth (Boix, 2015;Dustmann et al., 2014;Manow, 2020, pp. 85-86).Germany thus stayed on the export-trajectory but without the benign features that this regime had displayed during the post-war boom years.The Bundesbank was crucial during this stagnant period in preventing any shift in policies that could have challenged Germany's deeply engrained demand restraint.
This became particularly evident in the aftermath of German reunification.The country now had a much larger internal market and a larger segment of the economy that could not compete internationally.But the opportunity to rebalance the economy with stronger domestic demand was missed, and the Bundesbank played a decisive role in preventing such a shift.It quickly and vigorously imposed high financing costs on the government and urged it to cut its generous support programmes.Bundesbankers argued that the direction ought to be 'fiscal consolidation' and that such policy was needed to avoid overt conflict with its low inflation policy (Issing, 1994, p. 281). 5Bibow suggests that, because the federal government gave in to Buba pressure, it ushered in a period of self-reinforcing austerity and strengthened the country's reliance on exports: 'Due to significant tax increases real disposable incomes fell for large parts of the population over the 1990s, making the observed degree of wage moderation even more remarkable.Alas, Germany suffered from persistently weak domestic demand and became extraordinarily dependent on export demand' (Bibow, 2003, p. 155).High levels of unemployment further deepened the malaise as their costs fell on social insurance schemes that in turn raised labor costs.This contributed to a dissociation of a small core of competitive export companies drawing on global supply chains from a struggling domestic (service) industry (Manow, 2020, pp. 85-86).
Ironically, the policy fix to these dysfunctions came from European monetary integration.A first step was the Basle-Nyborg agreement of September 1987, in which the countries participating in the European Monetary System (EMS) strengthened their commitment to intra-European exchange rates without realignments.In their absence, inflation differentials could re-establish Germany's undervaluation advantage.However, speculative capital flows against the high inflation countries eventually led to the breakdown of EMS in 1993.This immediately led to the Maastricht Agreement in 1993, which cemented the idea of unchangeable exchange rates through the introduction of a common currency (Hanck e, 2013).The Bundesbank would lose its monetary policy competence in the process, but played a decisive role in keeping Germany on a path of wage restraint and frugal fiscal policy throughout the crisis years, thereby facilitating the subsequent real exchange rate depreciation and explosion of Germany's current account surpluses under the euro (Micossi et al., 2018).

The Fed: monetary policy for financialized growth
The Fed has a continuous institutional history as the manager of the United States' complex financial system.This is reflected in the Fed's very foundation as a body to forestall financial panics and mass banking failures (Goodhart, 1988;Gorton & Huang, 2002), as well as its early history as a decentralized system dominated by the Federal Reserve Bank of New York (FRBNY) (Meltzer, 2003).The key motivation for forming the Fed, and its problem in fulfilling its role, lay in a high degree of financial, associated with regulatory and political, fragmentation.The New Deal regulatory and institutional reforms (which created the FOMC) together with two world wars motivated crucial yet incomplete steps towards centralization and allowed the Fed to integrate its role as financial manager with the imperatives of macroeconomic management (Mehrling, 2011, p. 59).This brought a period of relative financial stability, 'Fordist' growth, and expanding credit (Taylor, 2015) for the country's booming housing market.
However, during the 1970s, this approach ran into contradictions.Most of the discussion on this period concentrates on Fed Chairman Arthur Burns' 'acquiescence to [President] Nixon' (Conti-Brown, 2016, p. 380) and his belief that he could achieve monetary stability through coordinated government policy (Johnson, 1998).In this context, it proved fatal that leading policy makers overestimated the country's potential output, motivating inflationary fiscal and monetary policy moves.But just as important for the Fed's failure in this period was a fragmented, only partially regulated financial system that created contradictory policy imperatives.Two developments stand out: First, regulatory limits on lending, e.g.reserve requirements, were less and less effective in an environment in which nonbank competitors drove a growing volume of business away from commercial banks while these banks themselves tried to catch up by circumventing New Deal rules (D'Arista, 1994, pp. 69-74).The Fed's fragile hold on the dynamics of expansion in the system began to loosen.At the same time, the Fed abstained from using the one device at its disposal to affect all financial institutions at the same time.This was its influence over interest rates via interventions in the Federal Funds Market (combined with alterations in the discount rate).A key reason for this was that parts of the regulated banking sector were threatened by the possibility of sudden spikes in interest rates.In particular, there was a real danger that the thrift industry would prove unable to sufficiently raise lending rates in concert with rising policy rates, with the result that thrifts 'would be forced to call loans and cancel further mortgage commitments, and this loss of credit almost instantaneously suffocated the housing market' (Johnson, 1998, pp. 123-124).Several studies argue that a primary motive for the Fed's interest smoothing policies during the 1970s reflected these concerns about the risks of financial crises and credit crunches (Axilrod, 2009, p. 95;Karamouzis & Lombra, 1989, p. 45).
Paul Volcker was appointed Chairman of the Fed in 1979 to deal with these dilemmas and with more vocal warning signs from the market-oriented parts of finance that started to price in ever higher future inflation (Greider, 1987, p. 47;Lindsey et al., 2013).Volcker was uniquely qualified for this task because he was a man with 'background in financial markets' (Hetzel, 2008, p. 150), who had already spoken out as President of the Federal Reserve Bank of New York (FRBNY) in favor of stronger interest rate responses to such signals from bond, futures, and commodity market traders in Chicago and Wall Street. 6In autumn 1979, though, it was yet unclear how this could be done.Volcker first tried a monetarist framework to convince markets that the Fed would accept full responsibility for inflationary outcomes.Complementarily, the change to non-borrowed reserves targeting was a strategic attempt to overcome the inertia of decision-making in the FOMC.The Chairman could now more independently instruct the System Manager to manipulate Federal Funds Rates to respond to divergences of non-borrowed reserves from the agreed targets (Axilrod, 2009, p. 112;Krippner, 2011, p. 117).But monetary targets quickly proved deficient for these different purposes.Not only did monetary relationships become highly unstable in the early 1980s, making it impossible to relate volumes of non-borrowed reserves to the money supply (M1) and inflation (Morgan, 2006).More important was that, despite painful disinflation, alleviated and volatile bond market rates failed to disappear.In fact, during 1981, in the face of rapid disinflation, bond prices rose further. 7Marvin Goodfriend (1993) introduced the suggestive term of 'inflation scares' for this phenomenon and reckons that it took until 1988 for this 'unusual long-run volatility to disappear' (ibid, 16).
Volcker's Chairmanship thus marks a point of transition, from a Keynesian full capacity economy to the increasingly unequal, deindustrializing, and financializing economy of the 1990s and 2000s.Part of the transition was also to decimate the smaller segments of banking in the savings and loan crisis and move to a marketized financial system.Securitization plus the development of highly liquid money markets (repo; commercial paper) made possible that different pockets of financial activities, from loan origination to refinancing operations, became integrated around a highly concentrated core of investment, commercial, and shadow banks (Calomiris, 1998).
It is under Chairman Allan Greenspan that the Fed ultimately found a way to incorporate these new features into a consistent policy framework.This rested on two pillars: First, the Fed engaged in coordination with financial markets to stabilize inflation expectations and the associated relationship between short-and longterm interest rates.This new attention for, and communication about expectations, helped the Fed in transmitting policy and provided the necessary confidence in finance to engage in long-term lending operations financed by short-term funding.The concrete practice of coordination consisted in the Fed communicating more openly about its decisions over the Federal Funds Rate and finding routines to incorporate the expectations of financial markets in such decision making (Krippner, 2007).A crucial part of this was to gauge the explicit policy expectations that crucial financial markets incorporated in bond and futures prices (Figure 2).A typical Greenbook of the time thus read like this: 'Prices in financial markets reacted sharply to events in the Middle East and the associated runup in oil prices.These circumstances apparently heightened expectations of an easing of monetary policy'. 8The point was to become as predictable as possible by coordinating market expectations with policy moves, for the dual benefit of policy efficacy and market stability.Reportedly, Greenspan became convinced that 'the market shouldn't be surprised.And if you minimize surprises … you would minimize unpleasant side effects … [Greenspan] also wanted to teach the market how the Fed was thinking and so that when the Fed indeed made a market move that it would be largely anticipated and then the shock value would not be there [ … ] the view really caught on that the Fed should be as transparent as possible'. 9Studies suggest that such increased predictability, through coordination around policy expectations, contributed to growing leverage in the financial system in the run-up to the 2008 crisis, thus becoming one supportive element of financialized growth (Adrian & Shin, 2008).
A second pillar of the Greenspan-Fed was to actively help in consolidating market-based finance.While first signs of the Fed's supportive role had already been evident in the early 1980s-when the Fed bailed out Continental Illinois and lobbied in support of legal exceptions for repo market trading after a prominent bankruptcy case -Paul Volcker had remained ambiguous in his regulatory stance.But a growing consensus at the Fed in favor of marketization and associated deregulations motivated Volcker's resignation and drove policy decisions under Alan Greenspan.Under his watch, the Fed made major steps to dismantle the separation of commercial banking from securities trading (Funk & Hirschman, 2014), facilitate the explosion of over-the-counter derivatives markets (Carruthers, 2013), and consolidate the role of repo as the core funding market for broker-dealers and as a quasi-deposit instrument for money market funds (Gabor, 2016).As the flipside of this, the Fed stepped up its role as lender and market maker of last resort for participants in the money and securities markets.Greenspan intervened repeatedly to forestall liquidity crises, insolvencies and downward movements in asset prices, e.g. during the Russian debt crisis, after the fallout of Long-term Capital Management and 9/11 ( € Ozg€ ode, 2022).Anna Cielsack and Annette Vissing-Jorgensen (2018) reckon that, by 1995 at the latest, the Fed had installed a veritable 'put' for stock markets, intervening with expansionary interest rate moves in response to significant drops in equities values.Markets started 'pricing in' the Fed's commitment to prevent financial downturns (Axilrod, 2009, p. 146) (Figure 3).
While elements of collusion (Johnson & Kwak, 2010) and officials' beliefs in the superiority of Wall Street (Kwak, 2014) certainly played a role in these policy decisions, the Greenspan-Fed acted in accordance with its own understanding how it could and should perform its central banking mandate in an increasingly financialized economy.For instance, an analysis of its economic reports reveals that the central bank was not single-mindedly focused on finance, but also cared a great deal about consumer and producer expectations.This indicates that it was not just favoritism for Wall Street, but a particular understanding of how the broader economy worked that motivated the Fed to act consistently in favor of market-based finance.Consistent with that, the 'Fed-put' installed in the mid-1990s reflected the Fed's assumptions about the macroeconomic impacts of stock market slumps.Its internal models predicted that, through a negative 'wealth effect', aggregate demand would suffer significantly from drops in stock market values, which justified expansionary monetary policy decisions in response to such drops (Cieslak & Vissing-Jorgensen, 2018).Fed forecasters particularly emphasized these 'wealth effects' because the 'representative agents' in their models were significantly affected by drops in stock market values, with strong predicted consequences for aggregate demand (Petrou, 2021).

Discussion and conclusion
In this paper, I have challenged the over-emphasis on convergence in central banking studies during the past years.In particular, I have argued that, beneath the general trend towards lower inflation rates in the 1980s to 1990s, central banks continued to differ significantly in on how they combined monetary with exchange rate and/or financial policies.A key inspiration for working out these variations comes from the growth models literature, which argues that different sectors and different growth drivers predominate in advanced capitalist economies.This led me to expect that central banking varies because it assumes a contextually specific support-function for different models.As a complication to the argument, I have posited that any central bank policy fix raises dilemmas that require officials to learn and innovate.This warrants a closer look at what happens inside central banks.Since their path-dependent institutional identities and associated constituency relationships inform learning processes in these organizations, and since authorities draw on routine patterns of sense-making, paying selective attention to problems and demands by economic constituencies while holding a particular image of themselves as monetary authorities, these learning and innovation processes are skewed in favor of policy solutions to uphold and revitalize, rather than challenge, existing growth models.
We have seen how this pans out at the Buba and Fed, two central banks that performed decisive roles in the respective German and US growth model trajectories.For instance, founded during the height of the Wirtschaftswunder in the late 1950s, the Bundesbank inscribed its institutional identity into Germany's successful period of export-led economic expansion, giving legitimacy and plausibility to a policy approach that emphasized the importance of low inflation, wage restraint, fiscal conservatism, and exchange rate stability.Big banks with strong industry ties constituted the key constituency for the Buba in rejecting currency revaluations.But the regime entailed an inherent contradiction, which was that the country could not consistently 'outcompete' its trading partners with an undervalued real exchange rate without feeling growing pressure from capital inflows and threats to its peg.This led to the most decisive period of learning and innovation, when the Buba moved from being a staunch supporter of unadjusted fixed exchange rates to being a monetarist central bank that would in doubt tolerate DM appreciation to maintain its domestic hard money stance and accustomed role as disciplining voice in corporatist coordination processes.The resultant policies helped the export sector consolidate on a lower growth and employment path with more outsourcing, leading to almost two decades of weak performance.Only European monetary integration finally resolved the central bank's dilemma and induced a period of real effective exchange rate devaluation that boosted export-led, macroeconomic growth.
By contrast, the Federal Reserve came to redefine its role during post-Fordism as a policy maker in support of financialized growth.This reflected the Fed's origins as a manager of fragmented banking system in a country with a long tradition of using credit as an economic and social policy tool (Prasad, 2012;Quinn, 2019).By the end of the 1970s, it had become clear though that high inflation and growing unrest on financial markets threatened the Fed's policy of interest rate smoothing, which had supported the government's Keynesian objectives while providing a shield for the more vulnerable parts of banking.However, while dismantling the traditional lending industry dominated by thrifts in the early 1980s, the Fed managed to reintegrate its roles as financial and macroeconomic manager with a new anchorage in market-based finance.This meant to coordinate with markets around inflation expectations and to expand the Fed's role as market maker and lender of last resort.Support for market-based finance was consistent with an understanding of the US economy undergoing rapid financialization.Just as the concept of systemic risk justified the Fed to backstop markets and large financial institutions, so did macroeconomic models tell officials that, when asset markets dropped, aggregate demand was at risk.These presumed 'wealth effects' were a central motif behind expansionary policy moves during the 1990s.
Table 1 condenses these findings and drives home the argument that the two central banks acted upon different institutional identities and conceived of their policies in fundamentally different ways.The Bundesbank adopted the symbolism of monetary targets in late 1974 to send warnings to wage bargaining parties, while the Fed in the early 1980s started to use its decisions over the Federal Funds Rate to signal its disinflationary intentions to bond market participants, implying two different notions of inflation risks and associated policy solutions.The Bundesbank relied on the putative success of its monetarism to strengthen its role as a disciplining voice within a broader corporatist policy process, while the Fed integrated its dual identity as financial and macroeconomic policy maker into market-based finance.We thus see how the central banks' deeply engrained institutional identities, and the patterns of sense-making and macroeconomic observation, informed policy choices that maintained the German and US economies on their respective paths, despite clear signs of crisis.These signs were apparent for the German case as early as the 1980s, when the German economy entered an export-led version of secular stagnation.In the US case, the 'Fed put' after 1995 and the central bank's ever more aggressive bail-outs indicated that, while the central bank was able to temporarily stabilize credit dynamics, these support operations increased system fragility over time.While the differences between institutional identities, sense-making patterns, and problem-solving strategies are clearly apparent and the nexus to growth models evident, the above analysis has several limitations.First, the analysis does not entail a clear statement about causality.Sense-making patterns at central banks are hopelessly endogenous to the organizations' structural situations and their institutional positions, which in turn reflect durable constellations of power.The reason for studying sense-making patterns then is that they help explain in a more comprehensive way how central banks specifically account for, and actively adapt their interventions to, context, rather than following some generic policy script.Precisely because central bankers enact patterns of sense-making that incorporate the differential structural power of economic actors over macroeconomic outcomes and that are consistent with their own, path-dependent institutional identities, they can establish effective policy making roles for themselves that constitute one crucial pillar of political support for extant growth models; neglect for alternative viable growth strategies is a crucial aspect of this process.Comparative, historical analysis of the kind presented here can then show how this role formation works through organizational perception and action, especially at critical junctures.
Admittedly, growth model theory has strongly relied on the US and Germany to characterize export-led and debt-financed consumption models, and I have exploited these model cases to work out the nexus with central banking.This raises questions about generalizability.For instance, Germany is a quite large and uniquely positioned economy in Europe (Lindlar & Holtfrerich, 1997) -most other countries with export-led growth models, e.g. in Eastern and Northern Europe, are much smaller and trade with Germany as another export economy.Existing studies suggest that this led these countries to seek fixed exchange rates with Germany and low inflation rates before European Monetary Union to stabilize value chains and long-term contractual relationships (Frieden, 2002;Hanck e, 2013); a predominant export focus made the use of monetary policy for domestic demand management unattractive.On the other hand, the US version of debt-based consumption is unique because of the dollar's singular status and unparalleled depth of the country's capital and money markets.This means that the possibility for capital flightinduced currency crises can be excluded.Even Great Britain, another country with a debt-financed consumption model near the top of the currency hierarchy, cannot neglect this risk, as several episodes from the late 1960s to early 1990s show.By implication, monetary policy decisions to calm markets and send confidence signals to international investors are more important here than in the US, shrinking the space for demand-inducing expansionary interventions.We thus need to be careful in categorizing cases and should seek to differentiate within categories of growth models to capture these variations.
Last but not least, my paper only covers the period until 2000.The idea was to use historical analysis to demonstrate the fundamental differences in central banking roles in different growth model contexts.Observers of more recent central banking developments have recognized that, during the 2010s, we saw more decisive turns away from hard money, when central banks engaged in expansionary bond purchase programs.While these policies were framed similarly across countries, it is important to recognize that they were differently designed and followed different objectives.As I previously mentioned, Reisenbichler (2020) has shown that the Fed and ECB adopted QE for fundamentally purposes and chose different instrument mixes to address the post-2008 'Great Recession'.Moreover, in exportoriented small economies, like Switzerland, extremely expansionary policies were adopted with a primary concern about the price competitiveness of domestic industries-what looked like QE actually was foreign exchange policy.This suggests that differences in growth models continue to matter for central banks, and that authorities in these organizations are acutely aware of these differences, drawing on institutional legacies and experience-based sense-making patterns to inform their heterogenous policies.

Figure
Figure Explicit policy expectations held by financial markets, as observed in Fed Greenbooks (references per year).Source: Board of the Federal Reserve and Bundesbank.