Monetary Control and Exchange Market Management: German Policy Experience from the 1985 Plaza Agreement to the 1989 Summit of the Arch

Abstract

For more than three decades, apparent conflicts between domestic and external requirements of monetary management have been a recurrent topic for debate on central bank policy-making in Germany. While such issues are not unfamiliar to other major central banks, German experience in this field has tended to exhibit specific national characteristics. Administered by a central bank, which enjoys a rare degree of legal and factual political independence, German monetary policy has traditionally aimed at a particularly ambitious degree of domestic price stability as its overriding ultimate objective. During the first 40 years of its existence the Deutsche Mark lost only 2.7% of its domestic purchasing power per annum, while its external value rose by 130% since 1950. Together with a small number of other countries with comparable policy preferences, notably Japan, Switzerland and the Netherlands, this low inflation standard placed post-war Germany within a short time into an internationally exposed position.