Friday, March 6, 2009

Money growth rules, Great Inflation and the Bundesbank (fg)


after a prolonged period of calm, some comments on current economic events and research: I just read a new ECB working paper by Issing et al (2009) on the role of monetary targeting, the Great Inflation in the 70s and the insitutional setting of the Bundesbank.

This paper is really worth-reading since it provides the reader with a well-written review on monetary policy developments within the Bundesbank. Most experts on the history of the Bundesbank will find again facts and insights to the doctrine of Issing and Co. To them, the explicit communication of an intermediary target, i.e. a money growth target, allowed to have a commitment device against inflation which made it feasible to fight inflation in the 70s and 80s. The policy strategy was not the result of the belief in the "monetarist counterrevolution" of the Friedmans, Brunners and Meltzers. The short honeymoon of Helmut Schlesinger with Karl Brunner in Konstanz came soon to an end. The policy was rather regarded as "pragmatic monetarism" that communicated the macro budget restriction to market participants.

Moreover, the autors show that such a money-growth commitment under an interest rate rule in the spirit of Taylor requires history-dependence of monetary policy. A central bank then reacts to past expectations errors, changes of output, interest rates, inflation etc. This is attractive but the same rule is favorized by Michael Woodford in his timeless perspective view of policy making without making any explicit reference to money growth. The point is that in Woodford's research, commitment is modeled in the loss function; meanwhile Issing derives commitment via the incorporation of the quantity identity.

Therfore, although, nicely written, the paper gives no new way of thinking about monetary policy - or does it Mr. Issing?