Abstract

Inflationary Risks as a Result of Overshooting Money Supply Targets?

Overshooting the Bundesbank’s money supply targets for 1986 and 1987 has increased concern about resurging inflation on account of monetary reasons. The monetarist theory claiming the existence of clear causal effects between money supply and the level of prices supplies the context of justification. The aim of this paper is to show that this perception, although offering a consistent picture, is in no way superior to amore Keynesian approach. A procedure oriented to the norm of “accepting existing conditions” promises a rather more relevant analysis than any holding fast to the monetarist norm of “perfect markets”. Such an open and more differenciated approach to explaining the causes of inflation — one which assumes a role of relative importance for monetary causes while not denying their existence — thus leads, of necessity, to a more complex decision-making pattern for monetary policy. In this context it is important for the current discussion that the causes of money supply expansion do not indicate inflationary dangers in the present economic environment. Precisely for this reason, monetary policy-makers should not be subjected again to the requirement of strict compliance with money supply targets, but they should review them in principle.