Abstract

Observations on the Current Fine-Control Strategy of the German Bundesbank

Since the turn of the year 1984/85 the German Bundesbank has endeavoured to effectively dissuade the banks from resorting excessively to Lombard loans in order to regain lost flexibility in money market control. To this end, however, the Bundesbank has not changed its actual monetary control strategy that it has pursued since 1979, but has only made a shift in priorities in applying its instruments, namely from one fine-control instrument (Lombard policy) to another fine-control instrument (security sale and repurchase transactions). Despite the regaining of a certain degree of flexibility in money market control, however, there still remain weak points in current monetary control, which have their cause in the dominant position generally assigned by the Bundesbank to fine-control measures. For instance, the marked preference for fine-control involves the risk of encouraging among the banks the view that refinancing possibilities are practically unlimited. Over and above this, the instrument of minimum reserve policy runs the risk of being pushed into the background. Lastly, considerable losses in efficiency must be recorded in the general interpretation of the interest rate policy of the Bundesbank. For this reason, a plea is made in this connection for a revival of the role of free liquidity reserves, by which means the indicated difficulties could be avoided substantially more effectively.