Wednesday, June 13, 2012

They did it, well not really (os)

Some weeks ago, I was wondering how the Deutsche Bundesbank can actually influence the German inflation rate as we (still) live in a monetary union. Well it seems like she can, indeed. However, in the wrong direction. As the Statistisches Bundesamt released, prices have risen by in May by 1,9%, which is 0.2 less that in April and the lowest value since mid 2010. All-thought, 1.9 is total in line with the ECB goal of close/below two percent, many economist argue for a higher inflation rate in the Euro-zone.

But what are we observing in Germany these days? Massive capital inflow from the periphery, which should call for rising prices here and lower prices abroad. However, German prices still do not rise, actually they drop. This may be owed to the fact that we do not have a fixed money supply. On the other hand, it seems like all the money from the periphery, deposited on German bank accounts, is returned to the ECB by those institutes and thus withdrawn from the circulation. In order to induce higher prices in Germany, which in turn could lead to a higher inflation rate for the Euro-zone as a whole and a growing discrepancy between German and Rest-of-Europe prices, the ECB should be more expansive (or less restrictive, as you like). More money, more inflow  - but at some point - no more deposits at the central bank on behalf of German commercial banks and alike and thus no withdrawal from the circulation. Is this the solution?