How do central banks make their far-reaching monetary policy decisions, why has their particular monetary orthodoxy come to prevail, and what sometimes leads them, under exceptional circumstances, to deviate from that orthodoxy? These questions are key to Manuela Moschella’s thought-provoking book, Unexpected Revolutionaries: How Central Banks Made and Unmade Economic Orthodoxy. Moschella challenges the widely held belief that central banks are socially and politically independent institutions that decide monetary policy based mostly on technocratic criteria. In the book, she disputes the idea that monetary policy reflects institutional learning processes when it comes to defining policy strategies at any given point in time. In her view, it is concern for the central banks’ reputation—and not a desire to set optimal policy—that serves as the driving force behind central bank action.

At first glance, this argument might seem counterintuitive. Reputation is closely linked to trust and credibility. Sometimes even to faith. Why should an institution that is formally independent from the government, whose leadership is not democratically elected, and which prefers to work behind the scenes, be guided by or even dependent on its reputation? Moreover, if monetary policy were only about the best policy necessary to keep inflation low and prices stable, why worry about public image?

Closer examination, however, reveals a more complex situation. An institution’s reputation is essentially a matter of trust. And trust is the most important asset in the financial world. Every investment involves making a bet on the future. The lower the level of trust that financial actors have in the success of an investment, the higher interest rate they will demand for that investment. When the risk is too high, trust can be increased if another institution offers to secure the trade. However, if no third party is willing or able to establish trust by credibly hedging the risk, no trade will take place. This is all the more critical when it comes to the system as a whole. Widespread loss of trust in financial markets can trigger a veritable financial crisis.

For this reason, the stability not only of financial markets but also of the very system of capitalism itself depends on central banks being perceived as credible and trustworthy. This is true in normal times, but all the more so in times of crisis. In this sense, central banks provide trust and credibility as a first and last resort. Rather than stopping at the insight that reputation is critical to this function, Moschella takes the argument a step further and reasons that if cultivating reputation is so essential to central banks, then preserving it has important, even crucial, bearing on monetary policy design itself.

In Moschella’s view, central bank monetary decision-making has little to do with the kind of technocratic principles or reasoning that follows optimal learning curves. What we are dealing with here, she argues, is rather a highly political and politicized context that strongly influences and even shapes monetary policy. This argument forms the core agenda of Unexpected Revolutionaries. Her analysis focuses on developments over the past decades in the US Federal Reserve (Fed) and the European Central Bank (ECB). She systematically demonstrates the role played by reputation in driving these central banks’ decision-making. By comparing changing conditions at these two institutions, she concludes that although the circumstances requiring policy decisions are of an economic and financial nature, what ultimately guides these banks’ policy responses are reputational considerations. Hence, she understands monetary policy decisions primarily, if not exclusively, as attempts to safeguard the central bank’s reputation. This interpretation highlights the extent to which central banks rely on public and government support.

To illustrate this, she cites the Fed’s September 2008 decision not to rescue Lehman Brothers, which she sees as based not on a lack of financial and economic knowledge but on the US government’s lack of political support for strong Fed intervention. As evidence, she points out that the Fed was at least partly aware of the effects that the collapse of Lehman would have on the financial sector. She explores the ECB’s asset purchase programs before 2012 as another example, calling attention to the fact that those programs had a clearly distributive effect and thus deviated significantly from orthodox monetary theory. She argues that this monetary policy would not have been possible without broad support from among the governments of the eurozone. While noting that the programs were designed to avoid inflation by neutralizing the additional liquidity provided, she holds that they were ultimately launched to maintain the ECB’s reputation as a conservative institution. Even though I would hesitate here to speak of active policy coordination between governments and central banks, I fully agree with Moschella’s argument that the influence of politics on central banks is significantly greater than generally assumed.

From this perspective, it follows that central banks are able to pursue policy decisions not because of, but rather despite their independence. Their actions and reactions are subject to the reputational pressure they face. Moschella argues that although central bank policy has always required political support, over the past several decades, and especially in times of crisis, decision-making on crucial monetary policy interventions has become increasingly politicized. Both the Fed and the ECB have had to deviate progressively from traditional policies in order to signal their responsiveness to public demands. This, she says, explains why central banks have come to place greater emphasis on social and environmental issues. It is what motivated the Fed to increase its focus on inclusive growth, and the ECB to turn its attention to green monetary policy. For Moschella, institutional change in monetary policy is ultimately driven by the desire to minimize the risk of reputational damage to the extent possible. Central banks, in her view, adapt monetary policy accordingly and deviate from orthodox monetary policy only if there is strong political support and their reputation is not jeopardized.

Moschella provides an abundance of evidence that reputation does indeed play a decisive role in monetary policy decisions. Nonetheless, it is open to question whether emphasis on reputation as the main game in town is not too limiting in certain respects. It is important to bear in mind that reputation itself is embedded in a socio-political and politico-economic context. From this, it follows that no central bank that expects to remain trustworthy can afford to regularly make suboptimal policy decisions. Processes of institutional decision-making are shaped by economic circumstances that central banks cannot ignore in the medium term. At the same time, they prioritize price stability and low inflation, even if the implementation of this policy has socially unequal and sometimes even suboptimal macroeconomic effects that may not always help to safeguard their reputation.

The question, therefore, remains whether the primary focus on the role of central banks’ reputation suffices to explain their policy decisions or whether a more comprehensive approach might offer a more nuanced perspective. Such an approach would first scrutinize the financial, economic, and ideological context underlying the decision-making process behind monetary interventions and then, in a second step, analyze reputational issues that might have led to the postponement, modification, or even hindrance of a central bank’s monetary policy decisions. It would also be necessary to examine the degree to which the Fed and the ECB have reacted to public opinion. Even though it is true that the Fed has begun to engage in the inequality debate and the ECB has introduced a number of climate change considerations into its policy framework, neither institution has, in fact, significantly changed its monetary policy. Hence, it might be going a bit too far to conclude, as Moschella does, that “the evolution of monetary policy can be traced to societal expectations and demands” (p. 130).

These observations are not intended to detract from the value of Moschella’s contribution to the debate on central bank policy decisions. Her arguments on the role of reputation are well-founded and convincing. The question now is what implications these insights hold for further research into and assessments of central bank policy. Politicizing a seemingly technocratic institution opens space for public dialogue about and with these institutions. Moreover, it serves to highlight the social and political pressure under which central banks operate. However, politicization can go in different directions: it could enable greener monetary policy, but it could also underwrite an autocratic takeover, for example. The politicization of monetary policy can, therefore, only be the beginning of a comprehensive discussion, not the ultimate goal.

With her book, Moschella joins the ranks of other scholars who are taking empirical research in a more holistic and context-dependent direction by investigating the interplay of the socio-political and politico-economic processes that facilitate and constrain central bank policies and decisions. Her insights are an important contribution to comprehending central banking for what it actually is—a highly political field of struggle.