Opting Out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods

By A. Beyer, Vítor Gaspar, Christina Gerberding, O. Issing. Social Science Research Network, 2009

112 citations recorded by the source corpus.

During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Soderstrom, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policy-makers at the time.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/97695190a99abd87cd5cb9d7e2651fbfc0827308

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Citations in the corpus

• Memories of High Inflation (2012, background): “…great inflation of the 1970s/1980s in Germany have often been ascribed to a high inflation aversion of the German society, which itself is usually assumed to have resulted from the fact that Germany had experienced hyperinflation in 1923 (Beyer et al. 2009, Issing 2005, Hayo 1998, Cukierman 1992).”
• The rise of the German Eurosceptic party Alternative für Deutschland, between ordoliberal critique and popular anxiety (2015, background): “The desire for monetary stability is so entrenched in German expectations and habits that it has been termed ‘stability culture’ (Beyer et al., 2009).”