Abstract

Control of the Monetary Base and its Components An empirical analysis for the Federal Republic of Germany

A monetaristic policy stands and falls with the ability of the monetary authorities to control the monetary base. The analysıs by Willms, according to which the German Bundesbank is able to exert sufficiently good control of the German monetary base, does not seem to give an exact description of and a solution to the problem of control of the base in the FRG, In contrast to Willm’s conclusion, the present analysıs shows that, especially in periods of disequilibrium in foreign trade, the Bundesbank did not succeed in exerting sufficient influence on the German monetary base. Willms’s results can be attributed to an inexact breakdown of the total monetary base into controllable and uncontrollable components. Moreover, it is evident that the separate analysis of various periods of time gives rise to big differences in the results relating to control of the monetary base. It is shown in further tests that monetary policy measures were thwarted to by far the greatest extent by the base component “net position of the Bundesbank vis-a-vis foreign countries”; even in periods of calm international economic relations, this base component hindered the measures of the Bundesbank much more than the discount and open market indebtedness of the banks together. Consequently it follows that, within the world monetary system prevailing in the period investigated (1951 - 1972), the Bundesbank could not achieve efficient control of the monetary base with its present instruments. If ıts desired to pursue such a monetaristic policy, the results of our study for the Federal Republic of Germany show that this is impossible under the system of fixed exchange rates which prevailed without interruption up to 1970. This conclusion is of decisive importance for the current intensive debate on reorganızation of the world monetary system.