Discusión de Resultados

A target for the central bank money stock was announced for the first time in December 1975. The central bank money stock is defined as the total amount of currency in the hands of non-banks and the required minimum reserves on banks'

domestic liabilities. The required minimum reserves are calculated at constant reserve ratios from January 1974 with 16.6% for sight deposits, 12.4% for time deposits, and

8.1% for savings deposits. Consequently, the components of the minimum reserves

are in a relation of about 4:3:2 to each other. Currency in circulation is given full weight in the definition of the CBMS. The differentiated weighting of the various components indicates their degrees of 'moneyness'. The CBMS differs only slightly from the monetary base, although the quantitative difference is highly significant, mainly in the way that it does not comprise the minimum reserve requirement on

deposits of non-residents and the excess reserves of the banks. The central bank money stock is a measure of the monetary expansion which has already taken place (backward-looking indicator) rather than a measure of the creation of central bank money. The CBMS serves both, as intermediate target aggregate and indicator of monetary conditions. The advantages of the CBMS as an intermediate target aggregate are its early availability (two weeks earlier than M3) and the fact that it is

calculated from monthly a v e r a g e s ^ ^ instead of end-of-month data as for Mi and M3.

The reported data for CBMS are, therefore, less subject to random influences in

comparison to the other monetary aggregates. Nevertheless, unexpected movements

in currency in circulation can temporarily lead to distortions and reduce the informative value of the indicator, but such developments had in the past, usually, returned to normal after a few months. If the divergences prove more persistent, the Bundesbank draws special attention to the distortions and their probable reasons in its

Monetary Policy in the Federal Republic of Germany

monthly analysis, to prevent the general public misinterpreting the stance of monetary policy23. CBMS has a relatively stable relationship to nominal GDP over the long term, which makes it particularly valuable as an indicator from a macroeconomic perspective24. The results of econometric studies suggest that changes in the central bank money stock and in the aggregates M i and M3 tend to run ahead of increases in

expenditure. Schlesinger (1983, p. 7) remarked that

“by prescribing a margin fo r the desired expansion o f the central bank m oney stock it can therefore be shown convincingly that m onetary policy can set a normative 'monetary framework' fo r the longer-term trend o f production and prices and fo r nominal expenditure in the economy - a framework which finally makes all those concerned share the

responsibility”.

Furthermore, CBMS is closely related to the monetary aggregate M3, since both

aggregates incorporate the same financial assets, only weigh them differently, and expand at roughly the same pace. The importance of the central bank money stock for monetary control by the Bundesbank arises from the fact that

“it underlines in a special way the responsibility o f the Bundesbank fo r the overall monetary developments: without an expansion o f the central bank money stock an increase in the money in the hands o f nonbanks is unthinkable. Calculated at current reserve ratios, the central bank money .stock is in the final analysis the direct contribution o f the central bank to

aggregate money creation”

Another factor, which played a crucial role in the Bundesbank's choice of CBMS as target aggregate, was that savings deposits are included in the definition of the indicator. In the past, the Bundesbank had been confronted with considerable problems in recording and interpreting the development of M; and M2 because of

frequent and often unpredictable changes in the deposit structure due to interest rate changes. Furthermore, institutional reasons might have played a role as well in the

22 Schlesinger (1983)

24 During the period 1961-1976, the growth rate of the CBMS deviated only in four of the years by more than 2 percentage points from the growth rate of nominal income. (Duvvendag, 1976, p. 276)

Bundesbank's choice of an interm ediate target aggregate^^ The Bundesbank influences the central bank money stock indirectly by changing short-term interest rates and bank liquidity yet faces considerable uncertainty about the intensity and time lags of this instrument. The Bundesbank lacks a fully reliable econometric model

of the m onetary transm ission m echanism , which necessitates a continuous interpretation of new data and evidence in order to allow an adequate response to the current monetary conditions. The Bank has made it clear that the control of the CBMS is not totally independent of the decisions of banks and non-banks, at least not in the short-run^^. When deriving the annual target for the central bank money stock the Bundesbank takes the following variables into account^*;

(1) the expected growth in the production potential,

(2) the desired change in the utilisation of the

production potential,

( 3 ) the 'unavoidable' price i n c r e a s e 2 9 ,

(4) the expected development of the 'velocity of circulation' of money^o.

An overall economic projection, which is discussed and co-ordinated with the government, precedes the formulation of the monetary target. The targeting procedure is based on the presupposition of initially stable prices and a normal utilisation of the production potential. The publication of the key data and the derivation procedure underlying the setting of a target for the CBMS by the Bundesbank, enhances the transparency of monetary policy and enables decision makers in other fields to adjust their actions and expectations accordingly.

26 If for example, the Bundesbank had chosen M f as intermediate target, it would have required drastic measures to inlluence M i with open market ojjerations, since the German market for open market papers lacks size, depth, and elasticity. Large open market operations would have too strong repercussions on interest rates in the money, credit, and capital markets, (source; Duwendag, 1976, p. 294)

27 Schlesinger (1976, p. 441) 28 Bundesbank (October 1982, p. 84)

29 The Bundesbank considers as an 'unavoidable* rise in prices a rate of price increase which cannot be prevented even by a policy strictly committed to stability (somewhat below the forcasted rate of inflation). When price stability is lacking in the initial stage, inflationary expectations have already affected arrangements between economic agents, although the central bank is aiming at price stability. (Bundesbank, October 1982, p. 85)

Monetary Policy in the Federal Republic of Germany

However, there are several problems which arise from the use of the central bank money stock as an intermediate target variable. Firstly, the CBMS includes a high proportion of currency in circulation with its full weight. Random shocks in the

demand for cash can temporarily increase the amount of cash in circulation, reflecting inadequately the degree of monetary expansion, since the increase in the cash holdings could be partly a result of shifts in the deposit portfolio. Since this statistical disadvantage can at times be quite considerable, the Bundesbank takes in its assessment of the monetary stance the development of other monetary indicators and a wide range of economic data into account. Furthermore, the similarities between the central bank money stock and the monetary base can easily lead to the misconception that the targeting of the CBMS is some sort of monetary base control concept^k Another point of criticism is the exclusion of minimum reserve requirements on banks' foreign liabilities, since they are not fundamentally different from banks'

domestic liabilities^^.

The Bundesbank used the central bank money stock as its intermediate target aggregate until 1987. Over the years, the definition of the money stock has undergone certain changes. For the first years after the adoption of monetary targeting, the annual target for the CBMS was defined as a single figure, this was changed to a target corridor (3% margin) in 1979, above all due to the experience in 1978, which witnessed a substantial increase in real terms in the D-Mark's value. The policy of monetary targeting is generally vulnerable to external developments. Moreover,

persisting uncertainties concerning the development of the macroeconomic variables

as well as short-term fluctuations in the demand for money prompted the Bundesbank to review the announced target after six months to decide, according to the monetary

21 Von Hagen (1988, p. 105) cirgues that “the performance o f an operating regime with the base as the operating target is superior to the performance o f the regime currently adopted by the

Bundesbank”. This result is obtained from an empirical evaluation of alternative operating regimes for money stock control based on the multiplier model.

conditions and trend, whether to aim at the upper or at the lower part of the target corridor.