Work in Progress

Central Banks’ Power and Purpose: A Case of Institutional Change

Arie Krampf, The Academic College of Tel Aviv Yaffo

Abstract

The rational choice and the sociological theories are the two most common frameworks that explain the behavior of central banks and the change of their behavior. This article argues that whereas those theories were successful in explaining the emergence of central banking orthodoxy in the 1990s and the convergence of policies around the idea of price stability targeting, both theories they fail to explain more recent trends, in which central banks deviated from the conventional policy approach. This article offers an alternative political-economic framework based on insight from historical institutionalism. The article argues that two concepts are necessary to explain the behavior of central banks: the power resources of the central banks and their purpose. To demonstrate this framework, the article traces the behavior and discourse of the Bank of Israel during the governorships of Jacob Frenkel (1991-2000) and Stanley Fischer (2005-2013), respectively. We argue that in each of the two periods the behavior and the discourse of the bank was significantly different, and that it can be explained by the different power resources of the bank and the different perceptions of two governors regarding the purpose of the bank.