Abstract

Recent Experience with Monetary Policy in the Federal Republic of Germany

The “renaissance” of monetary theory and the accelerating trend of inflation, which is a threat to our liberal social order itself, have brought monetary policy back into the forefront of interest in the sphere of economic policy. Since spring 1973, the change-over to floating has given the Bundesbank a broader range af action. In pursuing this policy, the Bundesbank has gone new ways to some extent. But it would undoubtedly be going too far to speak of a “new” policy, for the ultimate goals and the instruments of its policy have remained the same. Under the changed conditions brought by floating, the Bundesbank was able to reduce the free liquidity reserves of the banks to a point approaching zero. This was neccessary in order to make it clear to the banks, who assess their liquidity primarıly from the business standpoint, where the macroeconomic limits to their latitude for expansion lie. Thereafter, however, the Bundesbank allowed the reformation of free liquidity reserves to stimulate the process of money creation. An experiment venturing into terra nova is the formulation of a target for the quantity of money, which was published for the first time in December 1974. The object of setting a target is to define the limits set by stabilization policy for creation of money and induce more rationality in economic policy decisions. Even with this sort of target formulation, monetary policy cannot ignore the cyclical situation, but now it attaches more weight to the mediumrun aspect with the intention of achieving greater constancy of economic development in this way. The choice of the quantity of central bank money as the target magnitude was made in accordance with analytical and empirical expedience, and not the least of the reasons that made that choice seem obvious was the fact that is the point where money creation by the central bank and money creation by the banks meet. As an indicator, therefore, it signals not the impulses of monetary policy (as is attempted elsewhere with the monetary base), but the effected monetary expansion. Notions of the monetary base conception cannot readily be applied to the control of central bank money, because they do not reflect accurately the special responsibility of the central bank for the monetary and banking system, at least under the prevailing conditions in the Federal Republik of Germany.