MONETARY TARGETING IN WEST GERMANY, HOLLAND, AND SWITZERLAND

Eduard Bomhoff

Contemporary Economic Policy, 1985, vol. 3, issue 5, 85-98

Abstract: Links between fluctuations in domestic money supplies and subsequent fluctuations in rates of real output have been less visible in Western Europe than in the United States. This paper discusses some of the causes and investigates the stability of the demand for money in West Germany, the Netherlands and Switzerland. In all three countries, temporary changes in short‐term interest rates temporarily affect the demand for money. These temporary changes in the demand for money are reflected in temporary blips in the monetary statistics, as agents substitute among various monetary assets. The hypothesis that aggregate demand responds only to longer‐lasting changes in interest rates is tested by a two‐step procedure. First, the official data on European money supplies are corrected for temporary disturbances caused by temporary changes in domestic interest rates. Second, changes in real activity are regressed on a measure of monetary stimulus, which takes into account the correction for temporary disturbances. This two‐step procedure avoids some of the bias present in ordinary estimates of the demand‐for‐money function. The results show that the links between changes in money and subsequent changes in output are somewhat more tenuous in West Germany, the Netherlands, and Switzerland than in the U.S. but significant effects do exist. These effects are more easily documented when corrected time series for the European money supplies are used.

Date: 1985
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