Abstract

Asset Reserves and Open Market Policy in Controversial Monetary Theory Conceptions

Despite the very restrictive monetary policy of the German Bundesbank since June 1972, economic development in the Federal Republic of Germany is marked by rising inflation rates. For this reason doubts have recently been expressed as to whether the Bundesbank is at all in a position to limit overall economic demand by influencing the quantity of money and the volume of credit. However, since those aggregate monetary magnitudes continue to grow at almost undiminished rates despite the contractive policy, the failure of central bank policy might also be due to the fact that the Bundesbank’s monetary policy instruments are not sufficient to control these magnitudes effectively. Against this background, in recent months a plan put forward by the Bundesbank for the introduction of an assets reserve and another advanced by the Board of Experts for more effective organization of open market policy have been developed. This contribution demonstrates that the two reform conceptions are based on different interpretations of the transmission mechanism for monetary impulses. Underlying the proposal for reorganization of open market policy is the conception of the monetarists to the effect that the central bank can control monetary expansion only if it has a firm hold on the supply of central bank money. In contrast, the assets reserve plan is based on the hypothesis of the neo-Keynesians that the volume of credit is determined predominantly endogeneously and must therefore be controlled by the monetary authorities directly. The chief object of this article is to analyse the reform plans with regard to their impact and simultaneously to examine to what extent the recommended instruments are suitable to improve the efficiency of the central bank in the boom phase. The conclusions drawn from the analysis in respect of monetary policy are that the central bank should regard the quantity of money and the volume of credit as equal-ranking target magnitudes. T'his dual objective of its policy also damands reorientation of its instruments. In a concluding consideration of the situation it is shown that an assets reserve and reorganized open market policy might together form components of an efficacious reform conception for the Bundesbank’s monetary policy