Abstract

Interim Objectives and Indicators of Monetary Policy in an Open Economy

The interim objective-indicator concept of the German Bundesbank was modified a number of times in the past, but in 1973 a fundamental change was undertaken; that change may be regarded as coinciding chronologically with the introduction of flexible exchange rates. During the period of fixed exchange rates, the German Bundesbank pursued essentially a liquidity policy, which was subjected to frequent attacks above all by monetarist circles. In the period of flexible exchange rates, the central bank went over to a monetary concept more on the lines of monetarist proposals. This article shows that in the period of fixed exchange rates both concepts pursued practically the same interim monetary-policy objectives. With the decontrolling of exchange rates in 1973, additional aspects presented themselves for monetary policy and in particular for its efficiency. Under this sort of monetary system, there is much that argues for contrary effects of domestic monetary policy impulses on foreign countries. These contrary effects are of both macroeconomic and microeconomic nature. In the short run they are caused by international interest arbitrage and act via the balance of payments (circular flow aspect); microeconomically a similar contrary effect is exerted by international price relationships. This impairs the efficiency of monetary policy unless the nominal interest rate is also included in the theoretical monetary concept.