Opting out of the Great Inflation: German monetary policy after the break down of Bretton Woods

Andreas Beyer (), Vitor Gaspar (), Christina Gerberding () and Otmar Issing ()
Additional contact information
Vitor Gaspar: Banco de Portugal, Special Adviser, Av. Almirante Reis, 71 – 8°, 1150-012 Lisboa, Portugal., http://www.bportugal.pt/en-US/Pages/inicio.aspx
Christina Gerberding: Deutsche Bundesbank, Monetary Policy and Analysis Division, Wilhelm-Epstein-Strasse 14, D-60431 Frankfurt am Main, Germany., http://www.bundesbank.de/
Otmar Issing: Centre for Financial Studies, Goethe University Frankfurt, Mertonstrasse 17-25, D-60325 Frankfurt am Main, Germany., http://www.ifk-cfs.de/

No 1020, Working Paper Series from European Central Bank

Abstract: 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 Söderström, 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. JEL Classification: E31, E32, E41, E52, E58.

Keywords: Inflation; Price Stability; Monetary Policy; Monetary Targeting; Policy Rules. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
Date: 2009-03
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Related works:
Working Paper: Opting out of the great inflation: German monetary policy after the breakdown of Bretton Woods (2009)
Working Paper: Opting out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods (2009)
Working Paper: Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods (2008)
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