Philip Turner’s book is a product of many years spent as a senior official of the Bank for International Settlements in Basel, Switzerland, closely observing international debates among central bankers about monetary policy and participating in the internal processes through which the BIS developed the points of view which it expressed in its successive annual reports. Much of the book is devoted to an account of monetary policy over the past two decades, and in particular central banks’ adoption of balance sheet policies, but in this review I shall concentrate on the other main feature, namely the way in which points of view are formulated in official institutions.

The BIS has been widely acclaimed for having predicted the financial crisis of 2008. Turner’s own views were not always the same as the ‘house view’ of the BIS: specifically, the BIS house view put a lot of blame on the Federal Reserve’s monetary policy of the early 21st century, while Turner himself puts more emphasis on the behaviour and oversight of commercial banks, in my view reasonably. He describes vividly and convincingly how the ‘house view’ of the BIS developed and thrived, and contrasts its development with that of the International Monetary Fund.

In the 18 months since the book was published, the reputation of central banks has taken a considerable battering, because of their general failure to anticipate the surge in inflation that took place in 2021 and 2022. A good deal of the recent inflation has been the unforeseeable consequence of the Russian invasion of Ukraine and the ensuing sanctions on Russia, but by no means all of it: in the U.K. inflation had already reached 6.1% in February 2022, before the invasion. Many economists, including Larry Summers, Tim Congdon, Charles Goodhart and Manoj Pradhan, foresaw the surge in inflation which occurred, but central banks (and the BIS) continued to think that the upturn in prices was ‘transitory’. Consequently they persisted for much too long with ultra-expansionary monetary policies.

What went wrong? Two points are obvious. First, the error was not confined to a single country. It was made by, among others, the Federal Reserve, the European Central Bank and the Bank of England, all of which are mandated to pursue price stability. Second, the error cannot be blamed on a shortage of expertise. In 1954 and 1955, British monetary policy was badly misjudged. The episode, which led to the appointment of the Radcliffe Committee, was rather similar to the recent one, except that it was purely domestic. At the time, the Bank of England employed just two economists. Now, it and other central banks employ hundreds of highly-trained economists, but are still prone to make similar misjudgments.

Turner’s work provides some clues. Some institutions need to have ‘house views’. The IMF, for example, is obliged to have a house view on which to base its policy advice and lending conditions, and has a department which is responsible for maintaining it. Governments engaging in international negotiations need to have house views – for example, German official economists without exception believe fervently in the virtues of price stability and fiscal rectitude.

In the United States, according to Bordo and Prescott (writing in 2019), the existence of twelve regional Federal Reserve Banks, each with its own Research Department, in addition to the staff of the Federal Reserve Board in Washington D.C., has in the past facilitated the integration of new economic ideas, such as monetarism and rational expectations, into the Fed’s ‘house view’ and the design of U.S. monetary policy. However, it must be noted that the United States has not escaped the recent inflation surge.

The BIS had a distinctive and clearly-articulated house view in the 1930s, when it advocated an early return to the gold standard after the debacle of 1931, reflecting the views of its board members.  Later, it got along for many years without a house view. It was after the arrival of Bill White as its Economic Adviser in 1994 that it developed a new house view which stigmatised low interest rate policies as a potent source of financial instability, and consequently deplored Alan Greenspan’s monetary policy in the years before the financial crisis, and those of his successors after the crisis. Turner describes the debates and conflicts which occurred within the BIS as this house view emerged and was challenged, both by economists outside the BIS and by the pressure of events.

House views have a serious drawback in that, while they may stimulate debate among large institutions, they stifle creative thinking and waste talent within their own institutions. Economics departments in official institutions are organised hierarchically. New entrants typically join at an early stage at the bottom of the hierarchy. They are numerous, not well known, they aspire to rise, and most expect to move on in due course. Their function is to provide economic advice to those responsible for making decisions. In a central bank, the decisions in question will be decisions about short-term interest rates, or quantitative easing, or about the application of the various tools of macro-prudential policy that the central bank may wield. In an advisory institution like the BIS, they will be about what policies the institution should advocate. The question is what kind of ‘advice’ staff economists are supposed to provide.

In national central banks, the small cadre of decision-makers is kept separate from the much larger cadre of supporting economists. It is not for the supporters to suggest that the decision-makers have made a serious error, especially if they have in fact done so. They are, after all, meant to be supporters. In 1933, the Governor of the Bank of England Montagu Norman told his new economic adviser Professor Henry Clay that ‘we have appointed you as our economic adviser; let me tell you that you are not here to tell us what to do, but to explain to us why we have done it.’ Things haven’t really changed. There is nothing worse for a promising career than to be conspicuously right when one’s superiors are badly wrong.

Thus staff economists need to make themselves useful rather than creative. Central bank economists provide information that decision-makers will find useful, as well as briefing for officials attending meetings, reminding them of the arguments they are likely to want to deploy in debate. Economists at international institutions provide well-informed briefing for officials attending meetings at their institutions, and suggest what issues they might find it useful to discuss.

These highly-trained economists have a powerful incentive to suppress their critical intelligence and their capacity for original thinking in the early stages of their professional lives. In fact, they have more than an incentive. Papers published by officials of central banks, or of international institutions, routinely and properly include a disclaimer statement that the views expressed are those of the author alone and not necessarily those of their employer. But that does not mean that those officials can publish anything that they consider suitable. All such institutions examine employees’ papers before publication and reserve the right to refuse permission for publication, often under the rather Orwellian guise of ‘quality control.’ This applies not only to papers published by the employer but also to those published by some other publisher, e.g. an academic journal. Employers insist on published papers by staff members carrying the standard disclaimer, but are not reassured by its presence. It is therefore illogical for them to insist on it, but they all do.

Tony Blair, when he was Prime Minister, promised ‘evidence-based policy’. Central banks are producing policy-based evidence. Thus, for example, research into quantitative easing done by central bank economists has been shown (by Fabo, Janoková, Kempf and Pástor) to reach more positive conclusions about its efficacy than that done by academic economists. Turner notes that an independent review of research at the BIS in 2016 found that it, too, was ‘tailored to find evidence in support of a house view laid down by BIS management’ (p 103).

Moreover, central banks now dominate the market for macro-economists. They employ very large numbers, and they pay much better than universities and research institutes. Even academic economists have an incentive not to annoy central banks, for fear of damaging their future career prospects.

Economists employed by central banks might feel able to be more detached and candid in their analysis if they were content for their work not to be published. However, economists who don’t publish find it hard to get new jobs, so there would need to be an understanding that they would stay in the central bank for a long time, and that the central bank would be willing to keep them. They would need to be fewer in number, and they would need to be regarded as realistic candidates for policy-making positions, which could therefore not be reserved for better-known economists recruited from elsewhere. This was the staffing model of the Bank of England until the 1990s, roughly coincident with the advent of the Monetary Policy Committee, but it has been largely superseded.

The new model is wasteful and probably unsustainable. The separation between decision-makers and supporters fails to make the best possible use of the supporters’ talents. It assumes much too readily that the decision-makers have a monopoly of wisdom on big questions of policy, and that the supporters’ views on such matters are therefore surplus to requirements. This helps to explain why, despite employing hundreds of economists, the Bank of England has made the same mistake in the last two years as it made in 1954 – 1955. And more generally, it helps to explain the durability of house views: in a fascinating section of his book, Turner notes wryly that although the 2016 official review into BIS research recommended that it should in future be conducted in an open and unbiased fashion, and not tailored to support the BIS house view, thereafter ‘the BIS’s house view was maintained.’ The only way to change the house view is to change the people at the top of the hierarchy.

The immediate sources of the dysfunction are the hierarchical structures of central banks’ economics departments, and the central banks’ anxiety about the public relations consequences of the publication of an off-message paper by a member of the staff. However, the important papers of the future are likely to appear off-message when they first appear, and smothering them at birth is dangerously destructive. Moreover, it would not be straightforward to keep all the economists employed at the central bank on-message at times when the message has to be radically changed.

The recent inflation policy failure is serious enough to warrant re-thinking of how central banks are run: the Australian government has already announced such a review. Things are unlikely to remain as they are. Where the re-thinking will lead remains to be seen. A recent paper by Wheeler and Wilkinson accuses central banks of over-confidence in the models they use in making decisions, and it is hard to disagree. This is a fault of the economics profession at large. Examination of papers published in the most prestigious academic journals (by Glandon, Kuttner, Mazumder and Stroup, 2022) shows a trend over the past forty years towards work in which formal models play an integral part: there has been a shift from facts to theory.

In my view there is a strong argument for central banks, and academic economists, paying less attention to models, loaded as they are with unrealistic assumptions, and much more attention both to emerging information about current events and to economic history, which records what actually happened in the past and can sometimes provide enlightening clues about the future. If that means acknowledging that economics cannot be regarded as a science, like physics or chemistry, then so be it.

Turner recommends that central banks and other official institutions should create independent evaluation offices to review their own policies. Some have already done so. The scope of the Bank of England IEO’s report on quantitative easing was, however, so heavily circumscribed by its terms of reference that the report was unable to address any of the main issues. Turner’s book is called ‘The new monetary policy revolution: advice and dissent.’ It is now clear that the revolution isn’t over yet. What Turner has to say about advice and dissent is highly relevant to how central banks can find a path to a better way of formulating policy. His book is recommended to those who are wondering where central banks might go next, including those who are charged with conducting inquiries into what went wrong.

The book is available via this link.