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1.1 Intermediate strategies for monetary policy The launch of a single European currency in January 1999 has been sparking a heated debate over what strategy the European Central Bank's policy should be based on so as to distribute and maintain monetary stability in Europe. In order to pass the Bundesbank's reputation as a tough inflation fighter on to the European Central Bank there have been strong efforts to make the ECB a close copy of the Bundesbank. It might be surmised that there will be a lot of similarities in its intermediate strategies. Among other indicators, the ECB's policy will be based on the growth rate of a broad monetary aggregate consistent with its definition of price stability. As a key instrument in the new central bank's instruments, REPO operations will constitute the main refinancing source of private banks and, in addition, minimum reserve requirements have been introduced to facilitate the authority's command over the banking sector's liquidity by means of stabilising the demand for central bank money. After having introduced monetary targeting in the 1970s, in the 1980s, the Bank of England and the Fed soon abandoned it again, because of distor tions from financial innovations and currency substitution. But the Bundes bank strongly defended its intermediate strategy of monetary targeting and advocated its implementation in the European System of Central Banks.
List of contents
1. Introduction.- 1.1 Intermediate strategies for monetary policy.- 1.2 The role of the Bundesbank.- 1.3 The methodological framework.- 2. Measuring monetary policy: Operating procedures and intermediate strategies.- 2.1 The conduct of monetary policy in Germany.- 2.2 Operating procedures and money supply.- 2.3 A note on the identifiability of money demand.- 2.4 A note on the identifiability of autonomous monetary policy actions.- 2.5 Evidence from recent empirical analyses of German monetary policy.- 3. Theoretical framework.- 3.1 Basic considerations.- 3.2 Interest rate operating procedure (from 1985 on).- 3.3 An alternative approach: reserves targeting.- 3.4 Discount window borrowing procedure (1975-1984).- 3.5 Concluding remarks.- 4. Analysis of time series using linear state space models.- 4.1 Basic concepts.- 4.2 The linear state space model.- 4.3 Specific properties of the linear model.- 4.4 Signal extraction using the Kalman filter.- 4.5 Structural analysis.- 4.6 Model selection and estimation.- 4.7 Modelling nonstationary time series and common stochastic trends.- 5. Empirical implementation and results.- 5.1 Is a multiplier approach adequate to model German money supply?.- 5.2 Monetary targeting and the business cycle.- 5.3 A quantity theory based approach to inflation targeting.- 6. Conclusions.- 6.1 Methodological remarks.- 6.2 Money stock control and the day-to-day conduct of monetary policy.- 6.3 Money stock control and inflation targeting in Germany.- 6.4 Prospects for the ECB's monetary policy strategy.- List of figures.- List of tables.- A. GAUSS-programs.- A.1 Estimation of balanced state space model.- A.2 Obtaining in-sample forecasts using the Kalman filter.- A.3 Calculation of impulse-responses.- A.4 Calculation of forecast-errorvariance decompositions.- A.6 Aoki C-Test for model specification.
Summary
1.1 Intermediate strategies for monetary policy The launch of a single European currency in January 1999 has been sparking a heated debate over what strategy the European Central Bank's policy should be based on so as to distribute and maintain monetary stability in Europe. In order to pass the Bundesbank's reputation as a tough inflation fighter on to the European Central Bank there have been strong efforts to make the ECB a close copy of the Bundesbank. It might be surmised that there will be a lot of similarities in its intermediate strategies. Among other indicators, the ECB's policy will be based on the growth rate of a broad monetary aggregate consistent with its definition of price stability. As a key instrument in the new central bank's instruments, REPO operations will constitute the main refinancing source of private banks and, in addition, minimum reserve requirements have been introduced to facilitate the authority's command over the banking sector's liquidity by means of stabilising the demand for central bank money. After having introduced monetary targeting in the 1970s, in the 1980s, the Bank of England and the Fed soon abandoned it again, because of distor tions from financial innovations and currency substitution. But the Bundes bank strongly defended its intermediate strategy of monetary targeting and advocated its implementation in the European System of Central Banks.
