Measuring monetary policy: Operating procedures and intermediate strategies

Abstract

The monetarist approach to monetary policy. In 1974, when German monetary policy was freed from the exchange rate constraints of the Bretton Woods era, the Bundesbank implemented a policy of monetary targeting. An annual monetary target for 1975 was pre-announced in December 1974. The policy had been maintained until January 1999 when the ECB took over the responsibility for monetary policy in Europe. The Bundesbank’s strategy reflected its adoption of the monetarist view to consider inflation as a monetary phenomenon. For that reason, controlling the money stock was thought to be appropriate to achieve its statutory goal of price stability. It started with targeting a point in money growth and from 1979 targeted 8 2. Measuring monetary policy money within a projected range. Thereby, in 1988, the Bundesbank shifted from “central bank money” to M31.

“if we consider one kingdom by itself, it is evident, that the greater or less plenty of money is of no consequence;”[...]“It seems a maxim almost self evident, that the prices of every thing depend on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Encrease the commodities, they become cheaper; encrease the money, they rise in their value. As, on the other hand, a diminution of the former, and that of the latter, have contrary tendencies.”[...]“It is also evident, that the prices do not so much depend on the absolute quantity of commodities and that of money, which are in a nation, as on that of the commodities, which come or may come to market, and of the money which circulates.” David Hume (1752)

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M3 as defined by the Bundesbank consisted of currency and sight deposits held by domestic non-banks with domestic credit institutions, time deposits for less than four years held by domestic non-banks with domestic credit institutions, and savings deposits at three months’ notice held by domestic non-banks with domestic credit institutions (see Deutsche Bundesbank (1995, p. 72)}. “Central bank money” as defined by the Deutsche Bundesbank (1995, p. 84) comprised currency in circulation in the hands of non-banks and the required minimum reserves (other than minimum-reserve-carrying bank debt securities) calculated at constant reserve ratios as at January 1974. Thereby currency was accounted at its full weight and bank deposits were included in accordance with the historical reserve ratios assigned to individual money stock components reflecting their differing degree of liquidity. Thereby a ratio of 16.6% for sight deposits, 12.4 % for time deposits and 8.1% for savings deposits was applied. The components included in this money stock largely coincided with M3. In contrast to M3, savings deposits at over three months’, but less than four years’, notice and bank savings bonds with maturity of less than four years were additionally included in the “central bank money” stock.