Central Banks’ Power and Purpose: Frenkel vs. Fischer at the Bank of Israel
The conventional political-economic theories of central banking—the Public Choice and the Sociology theory—fail to explain the behavior of central bank after the crisis. Particularly, they cannot account contradicting claims that central banks have become less independent but more powerful. They also fail to explain why would central bankers took steps that allegedly undermined their credibility. In this article, we argue that both theories makes too strong and restrictive assumptions regarding the behavior and central bankers and their motives, which prevent them from explaining what is perceived as heterodox behavior of central banks. Drawing on historical research, the article offers a Historical theory of central banking, according to which central bank behavior is determined by two variables: the purpose of the bank and its power resources. Those two variables are historical and may change over time and across cases. To demonstrates the explanatory power of the theory, the article trace the behavior of the Bank of Israel during the period of Jacob Frenkel and Stanely Fischer. The analysis shows that the behavior of the bank under the leadership of the two economist was significantly different. This change is explained based on the governor’s different perceptions of the bank purpose and the different power-resources of the bank.