Professor of Economics
Also INSEAD Working Paper N 1996/73/EPS/FIN
Although its primary ultimate objective is price stability, the Bundesbank has drawn a distinction between its money-focused strategy and the inflation targeting approach recently adopted by a number of central banks. The authors show that, holding constant the current forecast of inflation, German monetary policy responds very little to changes in forecasted money growth; they conclude that the Bundesbank is much better described as an inflation targeter than as a money targeter. An additional contribution of the paper is to apply the structural VAR methods of B. Bernanke and I. Mihov (Measuring Monetary Policy, working paper N 5145, National Bureau of Economic Research, Cambridge, MA June 1995) to determine the optimal indicator of German monetary policy: the authors find that the Lombard rate has historically been a good policy indicator, although the use of the call rate as an indicator cannot be statistically rejected.