The book considers issues relevant to the European Central Bank in refining and communicating its strategy. It offers a historical assessment of the Bundesbank's strategy of monetary targeting conducted from 1974 to 1998. In contrast to several other prominent studies it is argued that money played a flexible but very important role in the conduct of its policy. It also explores the implications of the identified monetary policy regime in the context of various theories of the money supply process.
The empirical analysis conducted in this study is based on a linear state space modelling approach which offers an appealing and direct representation of common stochastic trends. The framework is less restrictive and it is encompassing in that it does not construe the persistent dynamics as being driven by pure random walk components.

Klappentext

1.1 Intermediate strategies for monetary policy The launch of a single European currency in January 1999 has been sparking a heated debate over what strategy the European Central Bank's policy should be based on so as to distribute and maintain monetary stability in Europe. In order to pass the Bundesbank's reputation as a tough inflation fighter on to the European Central Bank there have been strong efforts to make the ECB a close copy of the Bundesbank. It might be surmised that there will be a lot of similarities in its intermediate strategies. Among other indicators, the ECB's policy will be based on the growth rate of a broad monetary aggregate consistent with its definition of price stability. As a key instrument in the new central bank's instruments, REPO operations will constitute the main refinancing source of private banks and, in addition, minimum reserve requirements have been introduced to facilitate the authority's command over the banking sector's liquidity by means of stabilising the demand for central bank money. After having introduced monetary targeting in the 1970s, in the 1980s, the Bank of England and the Fed soon abandoned it again, because of distor­ tions from financial innovations and currency substitution. But the Bundes­ bank strongly defended its intermediate strategy of monetary targeting and advocated its implementation in the European System of Central Banks.

Inhalt

1. Introduction.- 1.1 Intermediate strategies for monetary policy.- 1.2 The role of the Bundesbank.- 1.3 The methodological framework.- 2. Measuring monetary policy: Operating procedures and intermediate strategies.- 2.1 The conduct of monetary policy in Germany.- 2.1.1 The practice of monetary targeting.- 2.1.2 The development of instruments for monetary control.- 2.2 Operating procedures and money supply.- 2.3 A note on the identifiability of money demand.- 2.3.1 The identification problem.- 2.3.2 Money demand and monetary policy rules.- 2.3.3 Tracing the supply side using bank reserves?.- 2.4 A note on the identifiability of autonomous monetary policy actions.- 2.4.1 Common identification problems in VARs.- 2.4.2 Identifying monetary policy regimes.- 2.4.3 Narrative approaches.- 2.4.4 Unresolved issues.- 2.5 Evidence from recent empirical analyses of German monetary policy.- 2.5.1 Was there no role for monetary aggregates in Germany?.- 2.5.2 Did the Bundesbank pursue a Lombard rate regime?.- 3. Theoretical framework.- 3.1 Basic considerations.- 3.2 Interest rate operating procedure (from 1985 on).- 3.3 An alternative approach: reserves targeting.- 3.4 Discount window borrowing procedure (1975-1984).- 3.5 Concluding remarks.- 4. Analysis of time series using linear state space models.- 4.1 Basic concepts.- 4.1.1 Common approaches to multivariate time series analysis.- 4.1.2 The system theoretic approach.- 4.1.3 Filtering and smoothing.- 4.2 The linear state space model.- 4.3 Specific properties of the linear model.- 4.3.1 Innovation state space representation.- 4.3.2 Linear state space models and time series models.- 4.3.3 Minimality.- 4.4 Signal extraction using the Kalman filter.- 4.4.1 Filtered forecasts.- 4.4.2 Smoothed forecasts.- 4.4.3 The use of the Kalman filter in econometrics.- 4.5 Structural analysis.- 4.5.1 Impulse-responses to orthogonal innovations.- 4.5.2 Impulse-responses to non-orthogonal innovations using a Wold-ordering scheme.- 4.5.3 Impulse-responses to non-orthogonal innovations: Beyond the Wold-ordering scheme.- 4.5.4 The forecast error variance decomposition.- 4.5.5 Distribution of impulse-response functions.- 4.6 Model selection and estimation.- 4.6.1 The model building algorithm.- 4.6.2 Salient features of the algorithm as compared with VARs.- 4.6.3 Model specification tests.- 4.7 Modelling nonstationary time series and common stochastic trends.- 4.7.1 Detrending and common trend representation in econometrics.- 4.7.2 Modelling trend and cycle.- 4.7.3 A useful generalisation for cointegrated time series.- 4.7.4 Properties of the decomposition into permanent and transitory components.- 5. Empirical implementation and results.- 5.1 Is a multiplier approach adequate to model German money supply?.- 5.1.1 Data.- 5.1.2 Results.- 5.2 Monetary targeting and the business cycle.- 5.2.1 Data.- 5.2.2 Results.- 5.3 A quantity theory based approach to inflation targeting.- 5.3.1 Money stock control and inflation targeting.- 5.3.2 The P* approach.- 5.3.3 Data and results.- 6. Conclusions.- 6.1 Methodological remarks.- 6.2 Money stock control and the day-to-day conduct of monetary policy.- 6.3 Money stock control and inflation targeting in Germany.- 6.4 Prospects for the ECB's monetary policy strategy.- List of figures.- List of tables.- A. GAUSS-programs.- A.1 Estimation of balanced state space model.- A.2 Obtaining in-sample forecasts using the Kalman filter.- A.3 Calculation of impulse-responses.- A.4 Calculation of forecast-error variance decompositions.- A.6 Aoki C-Test for model specification.