Abstract

Results of a Weekly Analysis of Money Flows for the Federal Republic of Germany

The transaction in an economy are financed with payments, i. e. either with the existing stocks of money or with additional credits. For the purpose of credit policy control by the central bank, however, only the granting of credit can be influenced. If instruments other than a credit ceiling are employed, the object is to regulate the liquid funds of the banks. The amount of that liquidity balance is governed by market factors on the action of which the central bank can exert no direct influence. The liquid funds are held by the banks in various forms of liquid assets for the purpose of granting credit and preserving their solvency. Credit policy can either regulate directly the range of assets classified as liquid funds, or merely the use of the liquidity balance. An indicator and control standard are obtained for the liquidity balance with the aid of an analysis of money flows. In this instance a weekly analysis of money flows for the Federal Republic of Germany for the period from 1952 to 1974 was taken as a basis. It transpires, for example, that the cash in circulation and the public cash transactions with the Bundesbank show regularly recurrent movements, which lead to disturbances of the money markets. The foreign business of the central bank as a third market factor shows the strong influence on liquidity emanating from international goods and capital movements. Adjustment of liquidity balances was effected for the most part via the reserves held by the banks. The money market investments were of only slight significance in comparison. The established continuous alternation of liquidity inflows and outflows not only subjected the money markets to alternating hot and cold baths, but also had a disturbing effect on the cyclical trend. If it is ıdesired to eliminate these disturbing influences, the liquidity trend must be made more constant with the aid of credit policy. An instrument that is particularly suitable for this purpose is minimum reserve policy, the use of which permits short-term counteraction of liquidity fluctuations by making allowances for seasonal factors. Over and above this, greater use should be made of instruments which can directly regulate the amount of bank liquidity.