Log in

PKSG Working Paper Series

Working Paper PKWP1308

Framing finance: A methodological account

December 2013

Sheila C. Dow

The way in which financial markets are framed depends on who is doing the framing, although there are reflexive interdependencies between these framings. Mainstream economics frames financial markets as archetypical competitive markets, focusing on prices as the key information on which to base analysis. This follows from traditional positivist methodology where computability is the key to theory appraisal. Central banks draw on this analysis for their own framing, but modify it significantly in the face of the requirement to take decisions under palpable uncertainty; some understanding is perceived to be necessary for prediction. Participants in financial markets in turn employ quantitative models for forming their expectations; in conditions of market turbulence the limits to these models become evident, and indeed material to prices themselves. Further, for these participants, markets are a social phenomenon. Finally the households and firms whose experience of financial markets enables or constrains spending frame financial markets in yet another way. The underlying argument of the paper is that the way in which financial markets are framed in theory should reflect the different framings in the economy, and that this would benefit from input from other disciplines.

Keywords: Framing, finance, monetary policy

JEL classification: B00: History of Economic Thought, Methodology, and Heterodox Approaches E44: Financial Markets and the Macroeconomy E58: Central Banks and Their Policies G02: Behavioral Finance: Underlying Principles

Download: Working Paper PKWP1308