Abstract

On the Evidentiary Value of the Quantity of Central Bank Money as an Indicator in the Monetary Policy Concept of the German Bundesbank

Since 1973, the German Bundesbank has been using a new aggregate, the quantity of central bank money (@CBM), as an intermediate target and indicator magnitude. This article examines the hitherto neglected question of whether this magnitude can perform both functions simultaneously or whether it is not more likely that use of the @CBM as an intermediate target, as envisaged in the Bundesbank’s monetary-policy control concept, does not impair decisively its suitability as an indicator. As the intermediate target magnitude @CBM is also subject to influences from the non-banking sphere, it cannot, in the Bundesbank’s view, be controlled direct by the central bank, but only indirectly via interest policy measures. However, interest rate policy gives signals and awakes expectations concerning the level of future interest rates. On the basis of several examples it is shown how, in consequence of such expectations, in certain situations a policy of lowering interest rates may result in structural shifts in the quantity of money Ms; or even to an exclusively interest-rate-induced increase in Ms and thus, ceteris paribus, to a greater QCBM in each case. That expansion of the QCBM, however, need not necessarily be accompanied by a corresponding expansion of book-money creation by the banks and hence of demand that affects purchasing power. On account of the varying closeness of the relationship between bank-money creation and central-bank-money creation over the course of the trade cycle, the QCBM may thus, when used as an indicator, give a greatly distorted picture of the monetary trend. Therefore, the better the @Q@CBM can be controlled as an intermediate target with the help of interest rate policy, the greater in the risk that it will fail as an indicator.