Terms

Moral Suasion Jawboning Definition How It Is Used Example

Moral Suasion Jawboning Definition How It Is Used Example

Moral suasion is the act of persuading a person or group through rhetorical appeals, persuasion, or implicit threats instead of coercion or physical force. It is sometimes used in reference to central banks in economics.

Key Takeaways:

– Moral suasion persuades through appeals, persuasion, or implicit threats rather than coercion.

– Central bankers use moral suasion to influence market and public sentiment about their control and readiness to act.

– Verbal gestures and signaling through central bank minutes are commonly used in moral suasion.

– A famous example is the New York Federal Reserve’s intervention in the bailout of Long-Term Capital Management (LTCM) in 1998.

Understanding Moral Suasion:

– Moral suasion can be used to change attitudes or behavior in any context, but in economics, it refers to central bankers’ persuasive tactics.

– Moral suasion is sometimes called "jawboning" in the U.S., involving talk rather than forceful methods.

– It is becoming more prevalent as central banks have fewer alternative tools to boost the economy.

‘Fedspeak’:

– Moral suasion can be used publicly or privately.

– Fed chair Alan Greenspan’s criticism of economic mood in 1996 is an example of suasion.

– The Fed has used jawboning to convince markets of its commitment to economic recovery.

Moral Suasion Example:

– The New York Federal Reserve intervened in the bailout of Long-Term Capital Management in 1998.

– LTCM, a highly successful hedge fund, faced a crisis due to high leverage and the Asian financial crisis.

– The New York Fed coordinated a rescue by pressuring banks to provide funds.

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– The decision to pressure banks was seen as an alternative to more harmful tactics.

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