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Interest rate policy of the deutsche bundesbank: An econometric analysis for 1975 to 1992

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Internal and external economic targets which a monetary authority tries to achieve make its interest rate policy partly endogenous. This article analyses the Bundesbank's interest rate policy since 1975, the year the Bundesbank published its first intermediate money growth target based on estimates of an ‘inevitable’ inflation rate and expectations about economic development. Estimation of a discount rate reaction function suggests that German monetary policy responds primarily to the final objective of price level stability and to a smaller extent, to the intermediate money supply target. Moreover, cyclical movements and balance-of payments equilibria are found to significantly influence the Bundesbank's discount rate policy. Both the inflation rate and the current account enter the reaction function in a non-linear way. When inflation is above the targeted rate or when there is a current account deficit, discount rate responses are much stronger than in the case of ‘below target’ inflation or a current account surplus. Internationally, the Bundesbank discount rate policy is limited by US short-term interest rate movements.

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Schächter, A., Stokman, A.C.J. Interest rate policy of the deutsche bundesbank: An econometric analysis for 1975 to 1992. De Economist 143, 475–494 (1995). https://doi.org/10.1007/BF01384911

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