Financialization, Rentier Interests, and Central Bank Policy

I thank Jim Crotty for many helpful suggestions, Bob Pollin for very useful discussions on some of the material presented here, Minsik Choi, Dorothy Power and Max Maximov for excellent research assistance and the Ford and Rockefeller Foundations for essential financial support. All errors, of course, are mine and mine alone. Please send comments and suggestions to: [email protected] 2 Abstract "Financialization" refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operations of the economy and its governing institutions, both at the national and international levels. This paper considers one aspect of financialization: the increased use by central banks of "inflation targeting". An extensive review of the literature shows that there is little evidence that inflation targeting reduces the costs of fighting inflation. Moreover, I present new evidence that, with respect to moderate rates of inflation – under 20%-there are few macroeconomic costs of inflation. Hence, central banks' focus on inflation targeting cannot be explained by a "rational" social cost/benefit calculation and therefore, political economy analysis must be employed to explain its widespread use. The paper explores a "contested terrain" approach to understanding central banks' preoccupation with inflation fighting, an approach which concentrates on the relative interests of finance, industry and labor with respect to macroeconomic policy. I suggest that, in the case of the United States, financialization during the 1990's led to a closer alignment of large industrial and financial firms in the U.S., leading to a greater emphasis by Alan Greenspan and the U.S. Federal Reserve on financial asset appreciation as a goal of monetary policy. In the conclusion, I explore the contradictions and limits of this as a basis for sustained, expansionary monetary policy for the U.S.