Monetary Policy of Bundesbank Research Paper

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Deutsche Bundesbank in the period leading up to and following reunification. The paper explores the bank's monetary policies and considers their effectiveness in achieving the Bundesbank's stated goals of maintaining price stability in the German economy. The paper also discusses the role of credibility in advancing the Bundesbank's monetary policies.

Created by the Deutsche Bundesbank Act of July 26, 1957, the German central banks' mission was to achieve price stability. The Bundesbank steered the German economy through the expected collapse of the Bretton Woods system of fixed exchange rates, at its heyday from 1959 through 1968 (Garber, 1993). When Bretton Woods ended in March 1973, the transition to floating exchange rates gave the Bundesbank new scope for controlling domestic monetary conditions. This change opened up new opportunities for monetary policy, to which Bundesbank responded by pioneering the use of pre-announced annual growth targets for the money stock (Issing, 2005).

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During the course of its existence, the Bundesbank pursued monetary targeting policies which experts and analysts have sometimes assessed as controversial and in some cases counterproductive.

In the early 1970s the Bundesbank had to contend with inflation as the predominant problem for monetary policy makers. On October 31, 1972 the Council of Ministers of the European Community passed a resolution outlining the concept of monetary targeting based on a quantity equation. From that point on, the use of quantity theory became the basis for monetary target setting in Germany (Posen, 1997).

Germany began adopting monetary targets in December 1974 with the announcement of a growth target by the Bundesbank Central Bank Council. The Bundesbank had used the central bank money stock as its primary indicator of monetary developments since 1973, but this announcement marked the first time that.....

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