A brief background on recognition theory

Recognition theory will be discussed extensively in Part II. However, a brief discussion of recognition theory is called for as I employ the basic concepts in framing the current monetary conflict in Part I.

As applied in the IR field, the recognition paradigm has evolved as a useful analytical framework for understanding state interactions and competitive behaviour and conflict among countries.^{Footnote 9} I use recognition theory to describe the monetary system as an arena in which nations are involved in a ‘struggle over recognition’.^{Footnote 10} Following Tully, I see this as a struggle over the norms of recognition that govern the exercise of political economic power and the distribution of economic benefit that devolves therefrom.^{Footnote 11} Under our recognition framing, these norms of recognition represent the informal constitution for the operation of the monetary system, consisting of the rules of behaviour and conventions that govern who has standing and voice in the process.^{Footnote 12} The struggle on the part of EME members is basically for status, consideration, and an empathetic understanding – a ‘self-decenterment of the dominant actor’^{Footnote 13} – in establishing norms of recognition. As shall be seen, the global monetary system is a ‘voluntary governmental network’^{Footnote 14} and the governing norms and conventions are not well-defined explicit rules. Rather they are normative and prescriptive conventions that have evolved from the practice of monetary policy, and thus are concealed within and expressed through economic concepts and methodologies that rationalise this practice. As such, they are subject to application as exclusionary political rules operating in economic clothing, so to speak. Although an economic construct may be presented as immutable truth, the implicit norms are like other consensual norms: context-dependent and open to interpretation and contestation.^{Footnote 15} In such a framing, the criticisms of the EME can be seen as complaints about economic constructs being used by the dominant actor (Fed) as norms of misrecognition – exclusionary interpretations of economic reality grounded in a domestic-centric perspective. These norms of misrecognition (sometimes non-recognition) thereby function to exclude both the EME criticisms and the critics from the monetary policy discussion. The EME call for ‘updated rules’^{Footnote 16} can be seen as part of the ‘ongoing (re)construction of the normative structure’,^{Footnote 17} as an appeal for inclusive norms and a revised constitution acknowledging interdependence and the benefits of a global monetary perspective. It is important to note here that there may well be rational purposes and benign intent behind the exclusionary interpretations of the part of the dominant actor. However, I would contend that the analysis demonstrates that the rationality of exclusion of utilitarian logics is self-destructive and that inclusionary norms are ultimately essential in avoiding conflict and preserving a stable monetary order.

Following James Tully and Antje Wiener in terms of method I begin by examining the discourse in the ‘field of interaction’ and in ‘concrete cases of conflict’.^{Footnote 18} The field of interaction in the case of monetary conflict are the gatherings of central bankers, such as the IMF or G-20 meetings where speeches, official statements and media releases are used to convey the opposing viewpoints. These documentary materials represent what Antje Wiener describes as ‘discursive interventions’^{Footnote 19} in the struggle over norms of recognition. The conflictual interactions between the leading voices illustrate how economic terms and method function as competing norms of recognition. The EME critics Guido Mantega from Brazil and Raghuram Rajan of India and the monetary experts who support the EME argument are taken as proponents of inclusionary norms of recognition. The statements of former Fed Chairman Ben Bernanke, the architect and major defender of Fed policies, are taken to illustrate and describe the operation of the existing norms of misrecognition. Although the discussion is critical in nature, it is important to emphasise that it is not directed at Bernanke as an individual; rather I take Bernanke as an example of misrecognition through abstraction, reflecting the mindset and perspective that currently dominate the governance of the monetary system. The analysis of the Bernanke discourse is designed to show how a dominant actor in the monetary arena can effectively use economic terminology and method as exclusionary norms, or norms of misrecognition, to rule out of order the evidence and criticisms of subordinate countries.

Background on the economic problems behind the conflict

In the period following the financial crisis of 2007–2012, the US Federal Reserve responded with unprecedented accommodationist monetary policies. It sought to open credit channels and provide liquidity to the US and global economy with the now familiar programmes, Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE). In the process the Fed lowered policy rates to almost zero and created massive dollar liquidity by buying US Treasury and Mortgage Backed Securities, eventually amassing some $4.5 trillion in assets on its balance sheet. Although initial reactions to QE1 in 2008 were positive even from future critics in the international community,^{Footnote 20} some researchers immediately raised red flags.^{Footnote 21} A chorus of criticisms emerged when, even though the crisis conditions had largely subsided, additional credit easing measures, QE2 (2010) and QE3 (2012), were rolled out and the unprecedented zero interest rate policy was kept in place. As problems arose in EME countries, questions were raised whether the Fed was thinking about the negative effects this liquidity would have on the EME. Soon, finance ministers and central bankers in the developing countries began to register criticisms asserting that these negative effects were due to Fed policies, and the Fed was not paying attention.

What were these EME complaints all about? The problems attributed to QE and ZIRP policies were referred to under generic descriptions like ‘spillovers’, ‘externalities’ and ‘economic woes’. These consisted of significant economic and political economy problems manifested in various ways in the different EME countries. I orient this brief summary with excerpts from a 2011 Brookings Institution study entitled Rethinking Central Banking.^{Footnote 22} For a thorough treatment, the Bank for International Settlements (BIS) has produced detailed studies of the various economic problems attributed to QE, both during and since the financial crisis.^{Footnote 23}

The Brookings report found that the unconventional monetary policies of large-country central banks created liquidity that had ‘especially large and complex cross-border spillovers’ with ‘a substantial impact on their neighbors’. These consisted of capital surges, commodity price spikes, currency volatility, huge pools of ‘footloose international capital’, rising local interest rates, and spikes in sovereign and corporate debt issuance attracting ever-increasing inward capital flows.^{Footnote 24} The study traced the bulk of the spillovers to Fed policy. The reason: ‘The dollar is the currency that underpins the global banking system as the funding currency for global banks.’ Thereby, ‘permissive US liquidity conditions are transmitted globally, and US monetary policy becomes global monetary policy’.^{Footnote 25} The Brookings report was early in identifying the problems, but a voluminous literature has emerged supporting their early work.^{Footnote 26} To mention a few references, a 2015 BIS study describes how Fed QE/ZIRP policies led to EME currency appreciation and local bank debt creation and created a high risk of financial crisis and instability in the EME.^{Footnote 27} As a result of large pools of investment capital, another BIS study reported that US dollar debt issued to EME sovereign and corporate borrowers increased over 50 per cent to $9 trillion between 2010 and 2015.^{Footnote 28} This is viewed as a serious credit default concern since the US dollar has also appreciated 25 per cent against local EME currencies, making dollar-based debt correspondingly more expensive to pay back. Another 2015 study confirmed early complaints that Fed policy had influenced commodity price demand shocks that increased food price indices as much as 90 per cent as low interest rates made speculation in storable commodities cheap.^{Footnote 29}

The Brookings report also found Fed officials dismissing the EME, saying, ‘everything will be okay if you just let your currencies appreciate’.^{Footnote 30} Yet the Brookings study concluded that policymakers in countries on the receiving end of these capital flows actually could not escape by appreciating the currency. If they allowed their currency to appreciate, they would expose themselves to overvaluation, loss of competitiveness, and exports reductions. But if they fought the appreciation via intervention, they would find themselves on the receiving end of ever-larger inflows.^{Footnote 31}

This is a summary picture of the spillovers and economic/political economy woes of the EME – countries awash in liquidity, commodity demand shocks and no policy escape route. In the discussion below we hear these problems debated in the exchanges between the EME critics and their supporters on the one side, and the Fed on the other.

The ‘concrete case’ studies: The EME discursive interventions and the Fed responses

With this general background, I now look at the concrete language of the conflict. Guido Mantega, then Finance Minister of Brazil, was perhaps most outspoken and considered a major critic and antagonist of the Fed. Mantega had begun in 2010 lodging a ‘currency war’ criticism of the Fed.^{Footnote 32} In 2011 he began formalising his criticisms in his annual International Monetary Fund Statements where he not only was speaking for Brazil but also was delegated to speak on behalf of many other EME countries as well, including at various times Colombia, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste, and Trinidad and Tobago.

Mantega also made the case in this official statement that the reserve currency central banks (the Fed) are too domestic centric.

Mantega basically reiterated and expanded this general message in his 2012, 2013 and 2014 IMF official statements, again speaking on behalf of many other countries. He emphasised the imbalance in the fact that the EME economies were paying a high price for US-centric monetary policies but without standing or consideration.^{Footnote 35} Mantega asked the Fed for a ‘rebalancing’ of Fed priorities that would reduce the significant influence of Fed policies in the EME.^{Footnote 36} In terms of the struggle for recognition, Mantega’s statements are asking broadly for norms that would have the Fed putting less emphasis on domestic politics and produce a global perspective in Fed policymaking.

By 2012 Mantega began to ratchet up his public rhetoric, criticising the Fed for ‘a selfish policy that weakens the efforts for concerted action’ and for ‘reignit[ing] the currency wars with potentially drastic consequences for the rest of the world’.^{Footnote 37} This stronger statement echoed sentiments of many in the EME. Philippines’ central bank Governor Amando Tetangco also saw challenges to monetary policy presented by Fed actions.^{Footnote 38} China similarly expressed concern at the possible side effects of QE, with Zhou Xiaochuan, China’s central bank governor, questioning whether Fed monetary easing was actually good for the global economy.^{Footnote 39} A United Nations official and former Finance Minister of Colombia José Ocampo encapsulated the EME arguments: ‘Given the role of the US dollar as the dominant global currency, the Fed’s expansionary monetary policy generates significant externalities for the rest of the world – effects that the Fed is certainly not taking into account.’^{Footnote 40}

These are all explicit ‘recognition’ appeals to the Fed to eschew a US-centric, selfish stance and stop ignoring externalities and to consider the good of the global economy – all representing a general push toward inclusive norms of recognition. Ocampo gives these claims a constitutional basis, suggesting that the US dollar status as the global reserve currency carries implicit obligations.

The reserve currency based claim for recognition is important, so a little background is in order. Indicating its transactional importance, the US dollar is involved in over 85 per cent of foreign exchange transactions,^{Footnote 41} and over 100 countries either use the US dollar directly or as a peg or reference currency.^{Footnote 42} Furthermore, the countries in the rest of the world now hold roughly $4.2 trillion in US Treasury securities as currency reserves, constituting 64 per cent of global reserves, making the Fed by far the dominant reserve currency bank.^{Footnote 43}

Some may still question whether US reserve currency status necessarily entails implicit constitutional duties to monetary system members as Ocampo (and others) suggest. Those who argue for more attention to other members point to the significant benefits attached to dominance and reserve currency status. Although hard to value, total tangible and intangible benefits have caused reserve currency status to be characterised by monetary experts as an ‘exorbitant privilege’.^{Footnote 44} Whether exorbitant or not, the privileged status has raised expectations among those EME using the US dollar as reserve currency that the Federal Reserve should consider not only US domestic interests but also the interests of other countries holding dollars as well.^{Footnote 45}

Returning to analysis of the concrete case of conflict, the criticisms of the Fed also come from another set of important players in the monetary arena – the monetary theorists, a group Wiener calls normative interventionists.^{Footnote 46} A considerable literature has tracked the effects of Fed QE and ZIRP policies, most taking the side of the EME that the Fed should at least acknowledge the linkages and take greater responsibility for spillovers. The literature is now extensive but I will mention a few representative early studies and criticisms.

In an early paper, Noureddine Krichene of the IMF Africa Department drew the linkages between Fed policies and EME problems, showing that low policy interest rates (ZIRP), monetary expansion, and US dollar exchange rate all contributed to increasing upward pressures on commodities’ prices (including food prices in the developing countries) because low interest rates made speculation cheap and these prices are all quoted in US dollars.^{Footnote 47} ‘[E]xpansionary monetary policies of the developed countries, mainly the Fed, [are] setting commodity prices soaring … leading to a speculative ‘‘demand shock’’.’^{Footnote 48} A 2009 paper found the Federal Reserve was primarily responsible more generally for the global asset price shocks and their consequences.^{Footnote 49}

A report issued in 2015 by the International Institute of Finance reviewed the numerous studies of EME capital flows. It is hard to capture the nuances of these studies in summary form, but in general the studies reflect the mounting evidence indicating that Fed policies are causing harms globally and the Fed has a duty to take notice and end harmful policies where they exist. Such evidence can be easily dismissed if there is no constituted enforcement process for registering complaints.

The Bernanke response to the EME

Despite the mounting criticism and accumulating research findings of Fed responsibility for the negative effects of Fed policies, Chairman Ben Bernanke consistently resisted and dismissed the EME challenges. Media reports such as ‘Fed Chief Ben Bernanke Denies US Policy behind Record Global Food Prices’^{Footnote 50} and Bernanke’s speeches at the time succinctly capture the Fed position. In a 2012 speech held in conjunction with the IMF meetings in Tokyo, Bernanke argued ‘that advanced-economy monetary policies are not the dominant factor behind emerging market capital flows’.^{Footnote 51} Further, Bernanke suggests that he does not look at the effects on individual countries but rather at net aggregates, a misrecognition through abstraction. ‘It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies.’^{Footnote 52} Bernanke’s refusal to accept responsibility for the capital flow and asset price problems also rested on responses like the following: ‘[T]he linkage between advanced-economy monetary policies and international capital flows is looser than is sometimes asserted,’^{Footnote 53} and, ‘My reading of the recent research makes me skeptical that these policy differences are the dominant force behind capital flows to emerging market economies.’^{Footnote 54} Bernanke laid out what he thought the determinant factor actually was, ‘effects of capital inflows, whatever their cause, on emerging market economies are not predetermined, but instead depend greatly on the choices made by policymakers’.^{Footnote 55} He bolsters this argument with ‘I think it’s entirely unfair to attribute excess demand pressures in emerging markets to US monetary policy, because emerging markets have all the tools they need to address excess demand in those countries. They can, for example, use monetary policy of their own.’^{Footnote 56} Again, we see Bernanke’s perception that the EME are in control of their own destiny. This argument of EME free policy choice is key for Bernanke, but as a factual claim it is dubious as we will see below. Instead of seeing any negative effects, Bernanke points to the aggregate global benefits of Fed policy. ‘This policy not only helps strengthen the US economic recovery, but by boosting US spending and growth, it has the effect of helping support the global economy as well.’^{Footnote 57}

Under a recognition framework, in order for the EME to be recognised by Bernanke – that is, for Bernanke to give consideration to EME evidence – he is essentially telling the critics that there are ‘norms of recognition’ that they have to satisfy. The EME have to show that the Fed is dominant cause; that the EME has no free choice or monetary tools of their own; that linkages are tight; and that there are ‘net costs’. These are high hurdles of economic proof and collectively represent norms of misrecognition used as reasons not to consider the EME claims seriously. Bernanke consistently refused to admit causation or accept the assignment of responsibility for negative effects throughout his Fed chairmanship. And this stance continued after he left office as Fed Chairman in January 2014.

Raghuram Rajan: Discursive interventionist in the field of interaction

Raghuram Rajan, another important player in the monetary field of interaction, was a participant in the 2011 Brookings study and had been a long-standing critic of Fed policy while chief economist at the IMF. In 2014 Rajan became Governor of the Royal Bank of India. I discuss Rajan’s arguments in detail in Part II below, but in this section I describe an important episode where Rajan acts as discursive intervenor in the EME struggle for recognition. The exchange is telling as it reveals Bernanke’s resolute commitment to a scientific way of doing monetary policy grounded in abstract, aggregative empirical assessments – and the reputational challenge he feels as the EME criticisms call this method and perspective into question. Bernanke had been defending this methodology against many critics who claimed the Fed had not only missed but also mishandled the financial crisis. For example, in a 2010 speech Bernanke acknowledged some observers had called ‘for an overhaul of economics as a discipline’. But he argued that ‘economic science’ was concerned with theoretical and empirical generalisations and had not been at fault and therefore calls for a radical reworking were not warranted.^{Footnote 58} Now he was on the defence against the EME.

In April 2014 Rajan gave a speech at a Brookings Institution gathering of monetary experts where again he went over the problems of Fed unconventional monetary policy – the spillover effects and the surges of capital into the EME.^{Footnote 59} However, Rajan took a different tack: he presented a narrative form empirical assessment, explaining step by step how the Fed policies affected the periphery countries. Rajan thereby established the linkages between Fed policies and spillover effects that Bernanke had long denied. Rajan’s narrative empirical account stood in contrast with the abstract, quantitative assessments of Bernanke stylised models by which Bernanke was able to screen out externalities and spillovers. Rajan directly challenged this method of modelled abstraction for ignoring the obvious. ‘By downplaying the adverse effects of cross-border monetary transmission of unconventional policies, we are overlooking the elephant in the post-crisis room.’^{Footnote 60}

Bernanke had become a Senior Brookings Fellow after leaving the Fed and was in the audience. He challenged Rajan’s account in an exchange that was seen as intense and sharp in tone. The exchange between bankers made international news, indicative of the broad interest in this still smouldering conflict in the international community. It was described in the media as a surprising face-off, ‘Bernanke, Rajan face-off over US QE spillover’^{Footnote 61} and ‘Banker showdown: Bernanke tells off India’s Rajan.’^{Footnote 62} The actual verbal exchange was quite short, though telling. In brief, Bernanke replied: ‘[Your] speech just reflects the fact that you are very skeptical of unconventional monetary policies … you want the rules of the game to prevent policies with large adverse spillovers and questionable domestic benefits’; and ‘you have a different empirical assessment than I do’.^{Footnote 63} Bernanke’s objection that Rajan’s narrative empirical assessment is different is basically saying that it does not meet Bernanke’s empirical assessment standards. Bernanke sees his methodology as representing all that needs to be known and Rajan’s as inadequate. Bernanke also attempts to question the objectivity of Rajan’s type of empirical analysis with claims of intellectual bias – driven by Rajan’s scepticism about QE and agenda to change the rules.

Bernanke’s strong reaction against the narrative empirical assessment used by Rajan is readily explained by the fact it criticises the aggregated quantitative methodology for missing the elephant in the room. This goes to the very heart of the misrecognition scheme that Bernanke (and others who rely on similar methodology) use to control what empirical assessments are permitted and who has a say. If Rajan’s narrative approach were to become the norm, Bernanke could no longer so easily rule EME arguments out of order. Inconvenient facts and previously ignored countries might have a say. In his face-off with Rajan, Bernanke thus adds another requirement before he will consider the criticisms: the EME must use his empirical assessment, the methodology that allegedly overlooks the elephant in the room.

Helene Rey: A ‘normative interventionist’ in the ‘case of conflict’

The final person to be examined in the field of interaction is a monetary theorist, Helene Rey of the London Business School, whose studies linking Fed crisis policies and spillover effects in EME appeared in 2007.^{Footnote 64} Rey was a Committee member of the Brookings initiative Rethinking Central Banking in 2011 and authored several papers on the global effects of Fed policies. In August 2013, Rey took her criticisms directly to the Federal Reserve in a speech at the Kansas City Federal Reserve Bank annual meeting in Jackson Hole, Wyoming. At the 2013 event, Rey put forth her theory of the Fed’s causative role in EME negative effects, stating that an ‘important determinant of the global financial cycle is monetary policy in the centre country’.^{Footnote 65} Her paper recounts the litany of the EME political economy woes in the global financial cycle: ‘low interest rates lead to bidding up of commodity prices’; ‘surges in capital flows, especially credit flows; monetary conditions in the centre country transmitted world-wide through these cross-border flows’.^{Footnote 66}

In December 2014, Rey was given a chance to extend her argument in the prestigious Mundell-Fleming lecture. By the time of the 2014 speech a considerable body of research was documenting ‘massive spillovers’^{Footnote 67} and supporting Rey’s case for dominance of Fed monetary policy and Fed responsibility for negative effects in the EME.^{Footnote 68} In her Mundell-Fleming talk, Rey hit her key arguments in direct terms. ‘Because the dollar is an important funding currency around the world … US monetary policy … changes the net worth of economic actors worldwide … of banks, asset managers, households, corporates.’^{Footnote 69} Furthermore, Rey advanced her argument that the actions of the Fed are determinant and demonstrated that the EME have little choice in countering the effects of Fed policies.^{Footnote 70} Rey concluded with findings that go to the heart of the Fed dismissal of EME criticisms. ‘In an environment with foreign debt (US dollar debt) on balance sheets, even with flexible exchange rates, the apparent ability to set its own interest rate is not enough for an EME central bank to achieve monetary autonomy.’ ‘Monetary policy in the center country may therefore transmit itself internationally.’^{Footnote 71} Finally, she concludes that ‘the (Mundell-Fleming) Trilemma misleads us’ by assuming that a country can control its monetary and financial future.^{Footnote 72}

Rey’s findings are important because they are a direct challenge not only to Fed policies but also to the Mundellian Trilemma hypothesis,^{Footnote 73} one of the pillars on which Bernanke’s case (and much current thinking in monetary policy) rests and by which the prevailing system of misrecognition is justified. This Mundellian Trilemma (MT), sometimes called the Impossible Trinity, is a foundational theory in international economics, perhaps Article 1 of the informal constitution of the global monetary system. MT forms the premises of the Mundell-Fleming model that is the primer for small open economy monetary management.^{Footnote 74} A key assumption of the MT theory and model is that peripheral central banks have ‘autonomy’ in the monetary policy realm – this being the basis of Bernanke’s free choice argument. Rey’s finding of virtually total Fed dominance and the Mundellian theory as misleading thus challenged three of Bernanke’s defences: i) that the Fed is not the dominant or determinant factor; ii) that the EME has autonomy or free policy choice; and iii) that the Mundellian theory finds fault with the EME. This assumption of independent autonomous central banks and the applicability of Mundell-Fleming are the core norms of misrecognition that Bernanke used to deny standing to Mantega and other EME criticisms. However, it seems Bernanke’s assumption that Mundell holds may be in error. Or at least, in Rey’s terms, it may be time ‘to qualify its meaning in a significant way’.^{Footnote 75}

Bernanke responds to Mantega, Rajan and Rey

Bernanke was invited to deliver the annual Mundell-Fleming IMF Lecture in November 2015, the year after Rey, thus providing an opportunity to respond to his critics.^{Footnote 76} This is now about five years after the original criticisms from the EME and 18 months since the confrontation with Rajan at Brookings. Unfortunately, although Bernanke admits some evidence of linkages, he basically uses the speech to deny Fed monetary policy was at fault, using an array of economic arguments to deflect rather than engage in dialogue with EME critics. I will not analyse the lengthy speech in any detail but rather highlight a few examples that further illustrate Bernanke’s consistent approach of dismissal and denial.

First, Bernanke singles out EME protagonists Rajan and Mantega as his major critics. Although he expressed tremendous sympathy for fellow EME central bankers, the content of his response contained no concessions to his critics or acknowledgement of responsibility for the consequences of Fed policy actions. His arguments were more debate points than substantive engagement in the issues. For example, even though Bernanke admitted that the arguments of Rajan and Mantega ‘overlap’,^{Footnote 77} he proceeded to artificially divide the currency war argument of Mantega from the financial stability argument of Rajan. To anyone who had been engaged in or closely following the ongoing monetary arena debate, this comes across as a rhetorical dodge. The criticisms that Mantega lodged against Fed policies under currency war and spillovers are fundamentally similar to the criticisms that Rajan included under his criticisms of financial destabilization and spillovers. They both had to do with the very wide range of interconnected negative effects of Fed policy in the EME.

Bernanke then proceeded to respond specifically to Mantega’s charge of currency war by defining it narrowly in terms of classical economic theory, which he described, ‘when a country eases monetary policy specifically to depreciate its currency, with the ultimate objective of cheapening its exports and gaining unfair competitive advantage in international trade’.^{Footnote 78} Using this narrow definition, Bernanke goes on to claim that since the Fed was not intentionally trying to depreciate currency in order to gain export advantage (even though that may be what happened), therefore the Fed wasn’t guilty of starting a currency war.^{Footnote 79} Despite the fact Mantega did use the term currency war in media interviews, in his official statements to the IMF Mantega’s empirical claims cited the widespread spillover effects to the EME countries – the capital surges, excessive liquidity, rapid credit expansion and asset price booms, etc. Bernanke’s lumping of Mantega’s criticisms under a narrow definition of currency war then simply allows him to dodge the main thrust of the Mantega arguments against QE. In Bernanke’s narrow technical reading of Mantega’s currency war reference, we see an economic construct used as a norm of misrecognition to exclude critical information and justify dismissing the criticisms of Mantega and the many countries he represented in his IMF Statements. So it seems despite all the evidence that has come in, Bernanke still sees no need to grapple with the issues in terms of the evidence that the EME introduced. Instead, Bernanke is still definitionally imposing the terminological norms that justify his misrecognition of the critics’ points. In the 2015 lecture, Bernanke also addresses the research community and Helene Rey in particular. Although Bernanke acknowledged the linkages established in the research of Rey and others, in the end he summarily dismissed the Rey thesis and conclusions that questioned Mundellian principles and put Fed monetary policy at fault. And he purports to do so on utilitarian formalist methodological grounds: for ‘lack of global factor benchmark, heterogeneity’, and for failure to consider ‘long period buildup effects’.^{Footnote 80} Again in Bernanke’s long rebuttal, we see no joining of the issue on substance but rather economic constructs again being used as ‘exclusionary’ norms of non-recognition. Bernanke once again avoids coming to grips with the EME claims, no matter how well supported. Bernanke also uses the Mundell-Fleming lecture to dismiss the call for more cooperation in monetary system – which many in the research community and the EME have argued to be critically important – using a ‘very simple’ hypothetical model, which Bernanke himself calls a ‘toy model’.^{Footnote 81} Analysing the model would be a lengthy exercise so I don’t go into detail. In brief, in his toy model Bernanke relies upon the Mundellian hypothesis to show that the EME tried to achieve both a lower interest rate and a competitive currency exchange rate (in support of full employment and exports) and thus violated the Trilemma dictates. Bernanke uses the model to conclude that the US really can’t help the EME avoid negative spillovers because the fault lies within the EME policies. Furthermore, Bernanke’s model finds that any small benefit the US could provide would be available only if the US does not pursue entirely its own interest to achieve maximum output. But Bernanke dismisses the idea that the US would not pursue maximum output in order to help an EME country as ‘pie in the sky’ and not ‘realistic’.^{Footnote 82} So he concludes there is only a small scope for monetary policy cooperation ‘given the empirical evidence we now have’. Thus he effectively ignores Rey using a toy model resting on Mundellian premises that she has demonstrated as misleading. Bernanke then uses this simple model to summarily dismiss the critics’ important suggestion that the Fed as the dominant reserve currency bank might help out the EME and the US by coordinating policy and thus achieve a cooperative optimal outcome.

In the Mundell-Fleming lecture, we thus observe additional instances where Bernanke insists on his own economic terms and methods as norms of recognition. Bernanke is able to ignore inconvenient facts and thereby deflect criticism: separating the Mantega and Rajan arguments, defining currency war narrowly, dismissing Helene Rey’s argument, using a ‘toy model’ to dismiss cooperation, and attributing the responsibility for spillovers to EME policies and failed macro prudential policy. This speech encapsulates why a reform of monetary system decision processes and reconstitution of the global monetary system is being called for. We see how aggregative thinking neutralises natural sentiments of empathy, thus preventing the econometricians from ‘acknowledging and experiencing our concrete and practical connections to others’ suffering and the burdens of responsibility that those connections entail’.^{Footnote 83}

Part I portrays the current conflict in the monetary system as a struggle over recognition with the Fed imposing norms of misrecognition and effectively freezing out the EME and research community criticisms. We see a global monetary system of central banks and finance ministries controlled by a dominant policy actor but no constituted regulative authority or formal redress and enforcement mechanisms.^{Footnote 84} In light of the described inadequacies in how monetary policy is formulated and conflicts addressed in the current monetary system, I propose the framework and principles of recognition theory.

Norms of mutual recognition

As James Tully describes international conflicts generally, conflicts within the global monetary system can be seen as struggles over the prevailing ‘norms of mutual recognition’ under which a system or practice is governed.^{Footnote 89} I adopt Tully’s concept of ‘norms’ as rules, conventions, customs under which members of the practice recognise each other and coordinate their actions. ‘Norms of recognition give to partners in practice the opportunity to call into question and renegotiate freely the subject to becoming outdated, always less than perfect existing norms.’^{Footnote 90} To facilitate the analysis I introduced above the category of ‘exclusionary norms’, or norms of misrecognition to denote the norms that prevent partners from calling into question or renegotiating norms.

Under this framework, the first step in understanding monetary system conflicts is seeing the monetary realm as an arena of struggle over competing norms where misrecognition and non-recognition take place on the part of the dominant actor. This occurs as a by-product of a dominant actor treating its own methodology as all that needs to be known and alternative methodologies being treated as inadequate, leading to ‘others’ being viewed as instruments for the dominant actor’s own ends, denied recognition on their own terms, and assigned a lower status.^{Footnote 91} This places the analytical emphasis on identifying the functioning norms of misrecognition. In the monetary arena this exercise can often be difficult because, as shown above, the norms of misrecognition are embedded in economic constructs under which alternative versions of economic reality are presented – hidden in economic hypotheses, definitional conventions, or model assumptions.

An example of how norms of misrecognition can be hidden in complex economic theories is the Mundellian Trilemma (MT), the ‘Impossible Trinity’ that was discussed above. To recall, MT is a foundational theory in international economics and forms the premises of the Mundell-Fleming model for small open economy monetary management. It holds that it is ‘impossible’, that is, certain failure, for central banks to pursue three of the following at the same time: a fixed foreign exchange rate; free capital movement; and an autonomous, independent monetary policy.

In understanding the struggle for recognition, the Mundellian Trilemma premises (and other constructs like it) must be seen as prescriptive in nature,^{Footnote 92} functioning as implicit norms of non-recognition. The MFT injunction – that a small country must not attempt to pursue the three policies simultaneously because they will ultimately fail – functions prescriptively as a protection of the dominant bank’s imposed monetary system and policies. This failure is not a feature of the natural world; it is a feature of the Fed policy modelled world. The pursuit of all three policies fails, as revealed in Helene Rey’s work, due to centre bank policy dominance. ‘Monetary policy in the center country transmits itself internationally.’^{Footnote 93} This is why Rey concludes ‘the Trilemma misleads us’ by assuming a country can control its monetary and economic future.^{Footnote 94} This assumption of autonomous central banks in control of their own futures and able to set policy on their own is the rationale of non-recognition that Bernanke has used to deny standing to Mantega’s criticisms. However, it now seems Bernanke’s case for non-recognition may be subject to question.

In another example of how Mundell-Fleming ‘requirements’ are elements of an economic hypothesis that can function as norms of misrecognition, Bernanke used an extensive ‘toy model’ exercise in his lecture to suggest that Brazil had broken the monetary conventions of the Mundell-Fleming model in trying to take all three policy actions (maintain a low policy rate, keep currency values fixed, and control capital flows). Under the terms of our analysis, Bernanke’s exercise may be interpreted as showing Mantega had breached prescriptive norms of recognition and thus was not entitled to be listened to in the complaints that he was making.

The proper way of looking at the Rey findings in terms of norms of recognition is that since the Mundell-Fleming premises no longer hold in the real world, then this particular economic convention is outdated, and its meaning and applications must be qualified in a significant way. Put more directly, the MFT hypothesis should no longer be a norm of recognition for the global monetary system. We can see the EME criticisms and the research theories as calls for outdated and exclusionary norms of recognition like MFT to be changed as circumstances and events unfold. In this way, the EME members have attempted – in classic recognition terms – to challenge the legitimacy of certain norms and to struggle to renegotiate the framework of unfair or oppressive norms of the monetary system.^{Footnote 95} From these examples, one might also see how other conventional economic concepts are used by Bernanke to function as norms of misrecognition. We saw how Bernanke skirted the currency war issue by defining it in textbook terms and then insisting on his form of empirical assessment. Another recent example is in the Fed paper, Clark et al. (2016), cited above,^{Footnote 96} that purported to support Bernanke’s argument by showing that the inflows to the EME were not really that significant. However, the researchers skirted the central issue by focusing on different economic constructs – net inflows and Foreign Direct Investment rather than the hot money Portfolio and Banking Channel total flows that the EME was criticising. Again we see a use of selected economic constructs functioning as exclusionary norms to rule out relevant EME evidence. Instances such as these illustrate how the Fed’s imposition of the economic terms, hypotheses, and categories of analysis can be employed as norms of misrecognition – or non-recognition – allowing the dominant actor to limit information and participation and thus control the terms of the debate. This sort of systematic misrecognition is a constitutive feature of the system of limited participation that characterises the current monetary system.^{Footnote 97} The first step in a recognition analysis is to expose these economic constructs and open up the debate. Prescinding from the particulars, this discussion helps explain why Bernanke is resistant to the EME criticisms. As we can see, norms of recognition ensconced in economic methodologies establish and hold in place certain relations of meaning and power.^{Footnote 98} When the circumstances change, the power relationship and norms of recognition holding it in place are under a threat to be changed as well. Thus a call for change in norms means that the power configuration is under challenge. In debates over effective monetary policy there also are professional reputations and status at risk as well. The EME critics thus not only challenge the Fed policies but also threaten preferred analytical framework essential to his research agenda and standing as a leading macroeconomist. The dominant actor would understandably tend to resist because its status and preferred recognition framework – enabling it to ignore evidence and argument as it sees fit, a prerogative of its dominant status – is put at risk through the challenge. This might partly explain the Fed tendency to resist the EME challenge and hold to its dominant position with exclusionary norms of non-recognition as long as it can, even seemingly against its own (or US) evident best interest.

Monological vs dialogical modes

In the exchanges above, we see what amounts to a refusal by the dominant actor to engage dialogically. The misrecognition that takes place (for example, in how Bernanke applies the Mundell framework) allows the Fed to impose monetary economics constructs from above ‘monologically’.^{Footnote 99} This is a ‘handing down from on high rather than passing through a participatory process’.^{Footnote 100} This monological perspective and method of operation is not a feature peculiar to Bernanke or the Fed, but rather a natural by-product of the rational actor formalist rationality that dominates macroeconomic thinking and monetary policy decision methodologies. Through a monological administration,^{Footnote 101} the Fed can sweep the periphery countries into its own economic system – whose elements it represents as universal – by monetary policy edicts issued in the form of Fed proclamations. These edicts rest on numerous stated and unstated economic constructs and are communicated in many forms, including Federal Open Market Committee (FOMC) Statements, FOMC Minutes, Fed speeches, FRB papers, G-20 presentations, and press conferences. Recognising how monological administration takes place in these edicts and seeing the difference in a dialogical norm formation process are critical components in applying the recognition framework to the monetary arena. Under an open dialogical process, all countries would have a forum to challenge both the policy edicts and underlying economic constructs and thereby be protected against being ignored in an abstract, aggregated calculus. The give and take of the dialogical process in renegotiating the norms in particular circumstances provide the comprehensive empirical assessments and increased mutual self-understanding that is critical to conflict avoidance and a stable monetary order. An inclusionary norms of recognition regime implemented dialogically, provides for a full recognition of other countries^{Footnote 102} and a proper circumscription of the dominant actor position. Of particular importance to the monetary realm, Tully’s form of recognition theory underscores the reality that the outcomes of struggles for recognition and dialogue are rarely final or definitive. The struggle for recognition is an ongoing process as monetary arena circumstances change and thus the dialogue must remain always open. As Tully puts it, ‘[A]n institution must always be open to the partners in practice of governance to call into question and renegotiate freely the always less than perfect norms of mutual recognition to which they are subject and be able to negotiate without recourse to force.’^{Footnote 103}

Recognition theory thus entails the realistic concession that reasonable disagreements are likely to remain a permanent feature of a regime such as the global monetary system where there are no laws but rather only circumstance-conditional economic conventions facing constantly changing circumstances. The recognition struggle as Tully sees it thus incorporates a process of endless revisability, requiring continued open dialogue among disagreeing parties seeking to achieve the best decisions possible, respecting legitimate differential and competing interests. It recognises that ignoring this principle (e.g., through monological imposition by the dominant partner) leads only to further antagonism, instability and conflict. This idea of endless revisability is key in the monetary arena because the economic constructs that govern the consensus formation are always circumstance-dependent rules of thumb, not universal laws, and thus in need of constant review.^{Footnote 104} It should be noted that Tully underlines another key point that a dialogical, negotiative process of understanding others is not only obligatory in establishing inclusionary norms of recognition but also essential to ensuring mutual recognition.^{Footnote 105}

As I wind up the discussion of dialogical mode, I would be remiss in failing to note the potential application of Jurgen Habermas’s constructs in designing an alternative analytical framework for the monetary realm. The many parallels with his work are evident. He too has notably advocated a non-nationalistic perspective and his frameworks explicitly address the threat of an unconstrained dominant actor. Further, the open dialogue of norm renegotiation that I develop here might be seen as an approximation of the ideal speech situation of Habermas’s communication ethics: using recognition frames. For Habermas, ‘(open dialogue means that the discourse is) immunised against repression and inequality in a special way’.^{Footnote 106} This immunisation of repression and preservation of equal status is quite similar to Tully’s rule of protected open dialogue. However, Tully and other theorists seem a better starting point for our initial proposal for the monetary arena. Habermas – looking mainly at political and not economic networks – might be willing to admit a certain finality of the open dialogue process, such as seen in his concerns for ‘enduring controversy’ and ‘dissensus’.^{Footnote 107} Although this point would require more discussion, these concerns seem to cut against ‘rejection of finality’ and ‘endless revisability’ of Tully that are critical in the monetary realm because, as we have seen, circumstances, rules, and consensus are never going to be final and fixed. Rather, the operative rules are embedded in a consensus built around circumstance-contingent economic constructs and methodologies. As circumstances change, the economic constructs and norms will endlessly need revising, and always in the full light of day. In addition, Habermas’s concern for ‘dissensus’ is not so much an issue in the monetary realm because participation in the monetary system is in the end voluntary. If dissatisfied, a party can, though not without difficulty, minimise contact with – and thus the influence of – a particular monetary regime, such as by reducing the US dollar in favour of the euro, yen, or eventually the yuan/reminbi. This is admittedly an all too brief treatment of the potential implications of Habermas’s work in any rethinking of monetary system. His early work on the potential problems of the European currency union revealed that he shared the central concerns of the EME case, that a dominant monetary policy would remove the capability of subordinate states to ‘macroeconomically steer’ necessary economic adjustments.^{Footnote 108} This short excursus is only to concede that Habermas should be engaged in future studies of the proper constitution of a global monetary system.

Recognition principles: Constituting a stable monetary order

Following the line of reasoning of Pierre Allan and Alexis Keller on a just peace, a recognition process that would bring about a stable international monetary order would take account of four principles of recognition: a thin theory of recognition, a thick theory of recognition, renouncement, and rules.^{Footnote 109}

The distinction between a thin and thick recognition is an important one for understanding the disagreement discussed above between Bernanke and Rajan at the Brookings Institution in April 2014 regarding the appropriate empirical assessment. As might be seen, Bernanke basically follows the thin theory and Rajan the thick theory. Per Allan and Keller, a thin theory is in place where the right of a member to exist as independent is recognised and there is a formal recognition of the potential for the differential experience of changing circumstances. But there is not a requirement on the parties substantively to recognise the particularities of other members – or potential negative effects of policy actions. The thin theory of recognition is approximately what exists today in the global monetary system from the point of view of the Fed as dominant actor. The other members of the monetary regime are minimally recognised by the Fed, as having standing as independent, autonomous participants, sufficient for them to be represented deterministically and reductionistically in Fed models. Furthermore, each member is expected to look out for itself. Recall the Bernanke claims that emerging markets have free choice and all the tools they need to address excess demand in their countries. However, we saw that Rey called misleading the Mundell-Fleming hypothesis that each country is theoretically autonomous and independent with its own monetary tools. So a thin theory assumption is arguably insufficient in the light of the current facts.

A fundamental tenet of recognition theory is that the dominant party must not only acknowledge the existence of others but must also have a thick understanding of the other member countries – and subgroups – in terms of their cultural, political and economic essentials.^{Footnote 110} The detailed empirical assessment envisioned in thick theory descriptions would bring out the needed information on the detailed inner workings of the periphery members and, in Rajan’s terms, avoid missing the elephant in the room. A thick theory of recognition means that the potential threats, harms, or difficulties created by the dominant policymaker and impacting other members are not only known intellectually, but, importantly, are empathetically taken into account. A thick theory of recognition thus involves a mutual empathy, an ‘inter-subjective consensus of what each side profoundly needs to remain self’, in other words, to maintain its socio-cultural stability and political economic identity and integrity.^{Footnote 111} And as we have seen, identity and integrity are clearly at risk in a non-empathetic imposition of monetary policy by an unnoticing dominant actor.

As envisioned by Allan and Keller, a thick theory of recognition would produce a sense of mutual empathy so that ‘red lines’ would not be crossed and subgroup essentials would not be threatened.^{Footnote 112} Under a thick theory of recognition the Fed would be fully cognizant of the negative effects of an expectable commodity price shock that exchange rate fluctuations would cause in the lives of vulnerable subgroups in the global population that are missed in aggregative calculations.

A thicker, more qualitative, empathetic sort of assessment of the effects of these Fed decisions would entail regular analyses of the impacts of US monetary policy on the prices of necessity commodities around the world, such as an examination of the effects of monetary policy on world staples like palm oil, corn, soybeans, rice, etc. The experience in world food prices post QE provides an important example of harms that can occur from a monetary policy that fails to consider the full array of negative global effects. Take India as an example of how subgroups can be ignored in an abstract, aggregated calculus and would benefit from a thick theory norm of recognition. A thick narrative description would reveal how devastating a dramatic increase in the costs of essential foodstuffs (of the sort researchers attribute to Fed monetary policy) would be to the Indian agricultural labourers who constitute hundreds of millions of the Indian population and for whom food is 67 per cent of the household budget.^{Footnote 113} Without this essential detail it is not possible for the Fed to fully comprehend the linkages and negative effects that broader empirical assessments could incorporate such as, for example, in Rajan’s narrative. The thin recognition of Bernanke’s aggregative calculation, which rests on the fact that EME aggregate GDP growth had increased, would give no indication of the harmful effects that were being produced to individual countries and subgroups in the EME by Fed monetary policy. A lack of detailed information and misleading aggregative abstract conceptualisations can facilitate a neutralisation of empathy and a misrecognition and minimisation of others’ identities and interests, even among those of benign intent. With misrecognition, as Jade Schiff warns, ‘it is easier to see suffering as having nothing to do with us – indeed, not to see it at all’.^{Footnote 114}

A thick theory of recognition also facilitates coordination and the achievement of jointly optimal outcomes. By undertaking the more detailed and nuanced empirical assessment of the thick recognition and having an empathetic understanding of each member’s essentials, the dominant party would come to understand the ways in which it is similar and connected to – and even reliant upon – all of the other members in order to make the global monetary system work. This leads to an appreciation of interdependency and potential for mutual benefit, the basis for cooperative decision-making and jointly optimal outcomes as advocated by Rajan, Eichengreen and others. The thin theory unfortunately does not lead to any notion of interdependency or the idea of mutual benefit; from the thin theory perspective coordination is in Bernanke’s words, ‘pie in the sky’.

Rajan and the other Fed critics clearly want to go beyond the thin theory as seen in his sharp criticism of the current monetary realm as a non-system, ‘my call is for more coordination in monetary policy because I think it would be an immense improvement over the current international non-system’.^{Footnote 115} Rajan has in mind the constitution of an inclusionary monetary system with responsibilities, conventions, rules, and ways to register complaints more fully mapped out.

The thick theory, in the end, requires and rests on James Tully’s concept of dialogical mode: open ended and endlessly revisable. The empirical assessment that Allan and Keller propose requires a dialogical modality by which all parties have an equal chance to have their positions heard in their own terms and against their own standards as to what constitutes negative effects. With a thick assessment, the dominant large country central banks would no longer be free to monologically impose the empirical assessments or economic theorems to be used such as in Bernanke’s conceptualisations in the Mundell-Fleming lecture. The Tully dialogical mode of endless revisability with no finality helps to ensure an extended conversation and a thick recognition of political and economic essentials. In this sort of framework one can see how the thick theory, dialogical modality, interdependency, and cooperative intent all work together in constituting a reformed monetary system.

The thick theory requirements draw into serious question whether aggregative econometric models are suitable for setting monetary policy in a complex global economy. Instead they suggest that a more comprehensive empirical assessment like Rajan’s might better account for assessing the full consequences of policy actions. This is essentially the issue that Rajan was raising in saying that current norms of recognition are missing the elephant in the room. Despite such criticisms, if the 2015 Mundell Fleming speech is indicative, Bernanke seemingly remains absolutely committed to the theoretical methodologies of ‘economic science’ that he set forth in his 2010 speech.^{Footnote 116}

Renouncement and rule: The other key principles of recognition theory

According to Allan and Keller’s principles of recognition, there are two other requirements for a stable order. They term these principles renouncement and rule. Under the renouncement requirement Allan and Keller offer an important insight, namely that for a stable order to exist, the dominant policymaker must not only fully understand the other but also be open to – and even ready to make – concessions or compromises in favour of the other.^{Footnote 117} (This of course flies in the face of the rational actor model so essential in current economic constructs.) Conflict theorist Thomas Lindemann captures this same insight in his idea of ‘conciliatory recognition’.^{Footnote 118} They envision a world order of unequal parties in a constant negotiation (similar to Tully), where to achieve stability the dominant party must confer equal status on other members of the practice for purposes of the open dialogue and at least be willing to sacrifice what it may consider its priorities and maximal outcomes. Renouncement is a foundational inclusionary norm of recognition.

Rajan seems to be seeking this sort of conciliatory recognition in the monetary realm in the request for a specific new convention to avoid and thus internalise spillovers.

Avoidance of spillovers would often require concessionary formulations and a sacrifice of optimal outcomes by the dominant party. What Rajan and the Brookings report are calling for in the discussion of spillovers is that the dominant central banks internalise, that is, admit the negative consequences and absorb more of the economic pain rather than exporting it to the smaller less-developed countries. As we saw, at this point Bernanke’s view is that this is pie in the sky. But Bernanke might reconsider his position if he took into account long-term negative consequences and the nuances of recognition theory, under which a dominant party would not necessarily be expected to make concessions if its own identity or integrity is threatened; the important thing is to narrow the grounds of ‘reasonable disagreement’^{Footnote 120} as much as possible.

The fourth principle of recognition theory that Allan and Keller propose is the requirement of ‘rule’. The requirement that they are getting at is respect for the idea of rule itself – the commitment to a rule-informed practice. It is essential that this commitment to rule be honoured even when outcomes might not go the actor’s way. Tully’s ideas of endless revisability and rejection of finality both depend on and provide support for a rule-committed process. Even compromises of interest would not ensure that a permanent consensus on specific rules could ever be reached. The idea of rule is especially important in a voluntary network such as the monetary system where there will likely never be written and enforceable rules.

In terms of specific rules, it is worth pointing out that renouncement and rule come together in the avoidance of spillovers. The renouncement that is sought – an internalisation of some of the negative effects – would become a new rule of the game, a new norm of recognition. Rajan is saying that there are implicit rules in monetary policy that the largest central banks, the dominant reserve currency banks, should be observing. The periphery members should be able to rely upon the dominant party to respect this basic rule-oriented framework.

Rajan’s vision for a coordinated global monetary regime and an updating of rules gets close to the dialogical mode that Tully seeks to institutionalise. One question that arises is whether Rajan’s request for updated rules is truly an appeal for a global perspective or simply in India’s self-interest.^{Footnote 121} Rajan anticipates the charge of potential self-interest and claims the high ground. ‘My remarks are motivated by the desire for a more stable international system, … not the specifics of our [India’s] situation.’^{Footnote 122} Thus the content of rule that Rajan advocates is not seemingly self-interest oriented but rather what General Director of the Bank for International Settlements Jaime Caruana has referred to as the rule of ‘international perspective’.^{Footnote 123}