Workshop on critical macro-finance and global challenges

What critical macrofinance teaches us about the postneoliberal state

We live in a postneoliberal age, or so we often hear. The state again has transformative ambitions, guided by national security, SDG development or clean industrialization priorities. A critical macrofinance lens focuses on the question: how to pay for transformation? The public money avenue necessitates reform of the macro institutional set-up that separates monetary, fiscal and industrial policies. Absent political will for this, a private money approach promotes new public-private partnerships where the state mobilises (local/foreign) private capital by making strategic priorities ‘investible’. This second approach has advocates in the OECD or the World Bank, informs the US IRA and EU green industrial strategies, Colombia, Indonesia or Brazil’s decarbonisation plans. The paper first outlines the policy toolkit for the ‘mobilise or perish’ imperative and examines the implications along three dimensions: the pace of structural transformation, the distributional tensions, and the geopolitical tensions in the context of great power competition.

Theorising non-bank financial intermediation

The expansion of non-bank financial intermediation (NBFI) presents a challenge for monetary theories which emphasise the macroeconomic significance of commercial bank lending. The heterodox literature which has emerged since the 2008 crisis falls roughly into two categories: a Post-Keynesian circuitist analysis and a political economy analysis influenced by Mehrling’s ‘money view’. Within this literature, debates on the importance and structure of monetary hierarchies, the determination of the unit of account, categorisation of instruments based on monetary functions, and the interaction between the state and the private sector reflect wider questions about how to theorise NBFI. This article argues that the participants of both sides of these debates insufficiently recognise the extent to which the so-called NBFI is integrated with the commercial banking system. Monetary theory has long recognised the significance of banking activities such as liability management, discounting of securities, and economising on settlement balances. Much NBFI can be understood as an extension of these commercial banking activities. Some areas of tension between theoretical approaches are then shown to reflect differences in emphasis rather than deeper divergence.

Central banking in subordinate financialised capitalism

This paper analyses the role of central banks in subordinate financialised capitalism using the example of developing and emerging countries’ central bank interventions in and after the Covid shock. As it has been pointed out in the recent literature, central banks’ balance sheets have expanded to unprecedented size. Moreover, central banks have mutated from lenders of last resort, to daily market makers. From a Marxist political economy perspective, this is unsurprising as central banks are as central banks emerge historically from the formation of money markets, and ultimately remain the bank of banks (Painceira, 2009). However, central banks are also the pivot between the domestic financial system, and the global financial system through the accumulation of foreign exchange reserves and foreign exchange market interventions. Thus, central bank’s role is not only to stabilise the domestic financial system, but also secure its safe and stable integration into global financial markets. This is particularly evident in subordinate finance spaces, where the power of global financial markets and the external imperative constraints monetary policy making for domestic purposes. The paper shows that this has been particularly evident in the recent Covid shock. As in developed economies, developing and emerging country central banks intervened actively in domestic capital markets, both public and indeed private. However, rather than supporting domestic credit growth, these interventions were largely shaped by the attempt to safeguard financial integration and secure exist for global (and indeed domestic) financial actors. 

Gross capital flows, current accounts, and financial instability: a monetary perspective

Much has been said about the relationship between capital flows, current account imbalances, and financial instability since the 2008 Global Financial Crisis. According to a popular narrative, capital flows from surplus countries drive current account deficits and financial instability elsewhere. I argue that much of this narrative is confused and lacks a convincing theoretical underpinning. Instead of drawing on a loanable-funds approach, macroeconomics, political economy, and macro-finance would benefit from a monetary perspective on capital flows. Such a monetary perspective utilises coherent balance-sheet accounting as well as heterodox economic theories of endogenous money creation, asset pricing, and balance sheet fragility to illuminate the causal impact of capital flows on current accounts and financial instability. Three main claims can be derived from this approach. First, the focus on the financial account or net capital flows as drivers of current accounts should be abandoned in favour of an analysis of gross capital flows. Current account imbalances usually are financed endogenously by net capital inflows and contain limited information about gross flows. Gross flows need not stem from excess savings in core countries and can be independent from trade flows. Second, inflows into the banking sector are not a precondition for local credit creation, but certain types of gross financial flows can contribute to destabilising financial booms through exchange rate appreciation and asset price inflation. Third, sudden stops in gross capital flows can be entirely unrelated to current account deficits but may trigger financial instability. The monetary perspective implies that too much attention has been paid to ‘excess savings’ in surplus countries at the expense of destabilising gross financial flows from global financial centres that are independent of current account positions. Speculative and volatile gross flows in foreign exchange, government bond, and housing markets should be discouraged by offering borrowers more patient domestic sources of funding. 

Is financial innovation market-driven or bank-driven? The case of private equity in the 1980s

Financial innovations, such as leveraged buyouts (LBOs), are often categorized as ‘market-based’ phenomena in order to distinguish them from more traditional ‘bank-based’ activities. This paper uses call report data to demonstrate the 1980s LBO boom was a bank-driven phenomenon and that the largest US banks relied on the senior loan debt issued in LBOs to provide the earnings that allowed them to absorb the losses from the LDC debt crisis. A banking theory framework explains why bank-driven lending can create economic distortions. One distortion due to this bank finance of buyouts is the increase in corporate income flowing to the financial sector. It remains to be seen whether the corporate debt levels associated with buyouts will turn out to be another distortion. We argue that bank-driven financial innovation is an important framework for studying additional instruments, such as collateralized loan obligations and private credit.

Boring role for pensions in new macro-financial regime

Comparative and international political economy points to important institutional and structural distinctions across ”varieties of” and “growth models” in capitalist economies. We have previously explored how these deep economic parameters shape pension fund asset demand and explain (at least in part) distinctions in pension fund behaviour. The critical macro-finance literature has put forward the  concepts of “macro-financial regimes” and “institutional supercycles”, with a focus on fiscal and monetary policy agendas, financial structure and cultural norms. These concepts are in principle well-suited, and a helpful sharpening compared to previous literature, to the analysis of pension fund behaviour. So far however this analysis has been missing. Our research seeks to fill this gap by seeing the macro-financial regime as determining pension fund behaviour, whilst also being in turn partly realised through that behaviour. We explore this idea in some detail using the UK as a case study, before offering up some developing ideas on how the role of pension funds could be quite distinct, and quite boring (albeit in a good way) in a new macro-financial regime.

Incorporating climate into the Eurosystem collateral framework

The Eurosystem collateral framework is a powerful policy tool. It determines the access of euro area banks to central bank liquidity and shapes market-based finance in Europe. The ECB is only now starting to address its carbon bias, through a 'passive' climate risk exposure approach whereby climate risk is treated as another type of credit risk and modelled based on a microprudential financial materiality perspective. Using bond- and company-level data, we critically evaluate this approach, contrasting it with a climate footprint approach that adjusts the haircuts and eligibility of the collateral framework based on the climate performance of bond issuers. Our approach adopts a double materiality perspective that views the collateral framework as a tool that can discipline carbon financiers and play a complementary role in the context of a ‘sticks and carrots’ climate policy mix. In contrast to our climate footprint approach, the ECB’s risk exposure approach will significantly delay the decarbonisation of the Eurosystem collateral framework. Moreover, the ECB’s approach would not guarantee smooth access to central bank liquidity if climate transition risks start becoming very high. 

Exploring the macrofinancial implications of the ‘30x30’ Global Biodiversity Targets

The Global Biodiversity Framework’s ‘30x30 targets’ aim to restore and conserve 30% of degraded ecosystems by 2030, as part of broader efforts to halt and reverse nature loss. The macrofinancial risks of conservation-related land use constraints economies remain underexplored, yet increased competition between land uses calls into question potential trade-offs between economic development and ecosystem protection/restoration. In this presentation, I propose a conceptual framework to articulate the channels by which a transition to implement the 30x30 targets may affect economic and financial stability. A key finding is that the importance of productive land to primary commodity production, as well as the specific role land plays within the financial system, means that land-related transition policy shocks impose additional and distinct risk transmission channels compared to climate-related policy shocks. Next, I present a simple cluster analysis approach to explore which countries might be most exposed to increased land competition between conservation and economic activities, indicating where macrofinancial risks might be most likely to emerge. The results suggest that risks are likely to be disproportionately skewed towards low- and middle-income countries, that generally have a higher proportion of lands of conservation importance, a higher exposure to land competition pressures, and a lower adaptability of the economy to pressures on the food system.

Schrödinger's Off-Balance-Sheet Fiscal Agency: The Recovery and Resilience Facility and the Limits to Incremental Fiscal Integration in Europe

The Recovery and Resilience Facility (RRF), introduced as the EU’s main macro-financial response to the COVID-19 pandemic, is an off-balance-sheet fiscal agency (OBFA) that has been hailed as Europe’s Hamiltonian moment and raised great expectations for future fiscal integration. Building on the emerging Critical Macro-Finance literature, we scrutinise both the RRF and the debt instruments it issues. We find that its innovative legal construction yielded ‘Schrödinger’s OBFA’: The RRF has an ‘institutional ambiguity’ which places it simultaneously on and off the EU budget to mitigate the EU fiscal rules. Moreover, as it lacks ‘immortality’ due to its exceptional and temporary nature, it is alive and already dead from a financial market perspective. As Schrödinger’s OBFA, the RRF’s institutional status places inherent limitations to the EU’s ongoing process of incremental fiscal integration and make it incapable of issuing securities that could assume the status of European safe assets.