2.9.2 CORTANTE Y TENSIÓN DIAGONAL EN VIGAS SIN AGRIETAR

While it is true that the ECB was designed after the model of the Bundesbank, the Eu- rosystem also departed from established Bundesbank practice in significant ways. In any case, since Germany had a strong influence on both the continuities and the inno- vations of the new monetary architecture, a basic understanding of the German mone- tary policy tradition is key.

Under the Bretton Woods system of fixed exchange rates the Bundesbank’s man- date to “safeguard the value of the currency” (Article 3 Bundesbank Law) amounted, in practice, to an exchange rate target. The disorderly shift in 1973 to a global mone- tary system of floating exchange rates left the Bundesbank bereft of the exchange rate as a nominal anchor for the ‘value of the currency’. After the alternatives – direct ad- ministrative controls on credit creation and a ‘liquid reserve ratio’ target (central bank money held by commercial banks less required reserves) – had been dismissed, a new consensus in favour of monetary targeting quickly emerged (von Hagen 1999: 686-687). The crucial question was then which monetary aggregate would make for the best intermediate target. In economic terms, this choice is determined by two con- ditions – the reactiveness of the aggregate to interest rate changes, important for cen- tral bank control over the aggregate, and a stable relationship with the overall price level as the ultimate target of monetary policy (Issing 1992: 293, 1997: 68). Between 1975 and 1987, these requirements led the Bundesbank to target the ‘central bank money stock’, which was defined as currency in circulation plus the reserves commer- cial banks were required to hold – “a kind of weighted and scaled M3” (Issing 1997: 69). In 1988, the Bundesbank switched to targeting M3, thus reducing the weight of currency in circulation, which had been increasing rapidly due to rising demand for

Deutsche Mark abroad. The growth target for these monetary aggregates was “the sum of the predicted growth in potential output, the normative rate of inflation that is acceptable in the medium term, and the trend rate of change in the velocity of circula- tion of money” (Issing 1997: 70). As the latter two indicators remained fixed during most years at 2% and 1%, respectively, the monetary growth target was to a large ex- tent determined by the Bundesbank’s estimates of potential output growth.

At least in its theoretical rationalisation, the Bundesbank’s preference for targeting money growth rather than interest rates was based on the monetarist argument that all that monetary policy could hope to achieve was to avoid policy mistakes and that prices, including the price for money, should be determined by market forces (Brunn- er 1968; Friedman 1968).106_{According to this logic, when fixed by a central authority,} “interest rates would cease to have their important allocational function in a market economy by virtue of being relative indicators of scarcity” (Issing 1992: 293).107 Moreover, a central bank targeting interest rates rather than monetary aggregates, by having to accommodate commercial banks’ demand for reserves at the predetermined interest rate risks losing control over the quantity of money in circulation, which would preclude the possibility of countercyclical stabilisation policies (Issing 1992: 294).

However, Issing’s arguments notwithstanding, the Bundesbank variant of ‘prag- matic’ monetary targeting – which had always been admired for its inflation record rather than for its theoretical underpinnings – was regarded with increasing scepticism

106._{For an account of the Bundesbank shift towards monetary targeting that highlights the import-} ance of political consideratios, see von Hagen (1999).

107._{This rationale was also cited by a former chief economist of a large German bank in an interview} (Interview 26).

by monetary theorists and policy-makers outside of Germany. Thus, a widely-cited ar- ticle argued that the Bundesbank did not, in fact, do what it said it was doing – that is, target monetary aggregates – but really acted as an inflation targeter in disguise (Bernanke/Mihov 1997). Building on this observation, advocates of inflation targeting insisted that the Bundesbank approach was intransparent because the monetary aggre- gate it attached so much weight to was actually economically unimportant: “[P]rag- matic monetary targeting implies that policy decisions are explained in terms of mon- ey-growth developments that are not essential for policy” (Svensson 2000: 80).

Again – as in the U.S. case – what looks like inefficient intransparency can be re- interpreted, from a Callonian perspective, as the successful disentanglement and fram- ing of expectation formation. Tellingly, the best formulation of this point is by Issing himself, in a passage that merits being quoted in full:

[T]he constancy of the Bundesbank’s monetary strategy and its actual success have made a substantial contribution to stabilizing market participants’ expectations and hence the statistical relationships between macroeconomic variables. I should like, therefore, to challenge Goodhart's Law with the following hypothesis: a policy of monetary targeting geared to steadiness and medium-term objectives reinforces the stability of the monetary relationship and hence the foundation of the policy itself.

(Issing 1997: 78) In other words, Issing suggests that what critics saw as the Bundesbank’s lack of transparency was actually – as in the U.S. case – the secret of its success in disentan- gling and framing expectation formation. According to Issing, the Bundesbank in- stalled a communicative apparatus that performed the very stability of the money de- mand function on which it depended, thereby creating the conditions for monetary insiders to form intersubjectively rational expectations.