Abstract

The Foreign Exchange Policy of the „Deutsche Bundesbank“

The present exchange rate system of “managed floating” combines flexibility vis-a-vis the U.S. dollar and other major currencies with a regional fixed rate system such as the EMS. The longer-term underlying trend of exchange rate developments is nowadays determined by more factors than just purchasing power relationships. These other factors - such as interest rate differentials, the balance of payments situation and the overall political climate - may be of just as fundamental importance for exchange rate formation as differences in inflation rates. By intervening in the foreign exchange market, central banks try to contain exchange rate movements, which frequently overshoot the basic trends determined in this way. The impact of such intervention on monetary policy must be duly taken into account. The Bundesbank intervenes in the DM/$ market and within the EMS. Interventions in the DM/$ market are optional and primarily intended to smooth exchange rate fluctuations. In the European Monetary System, by contrast, unlimited intervention is obligatory once the bilateral intervention points have been reached. Interventions are in principle in member currencies only - specifically, wherever the limit rates have been reached. In addition to obligatory interventions, “intramarginal” interventions are possible; they may be made before the limit rates have been reached and are subject to the agreement of the partner central banks. Besides its exchange-rate-oriented interventions in the foreign exchange market, the Bundesbank has concluded exchange swaps and exchange-based repurchase agreements on a considerable scale since 1979 in order to influence the money market and bank liquidity. They have proved to be a particularly flexible instrument for the short-term control of the money market. Judging from past experience, these money-market-oriented transactions - which can be effected at short notice, in precisely defined amounts, and with virtually any desired maturitiess - have no unwelcome repercussions on the foreign exchange market, or at least no effects other than those associated with all liquidity measures.