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Did the Bundesbank react to the US dollar exchange rate?

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  • Eleftheriou, Maria

Abstract

This study explores monetary policy conduct by the German Central Bank just after switching to floating exchange rates and before adopting the European single currency. With the world economy going through the ‘great inflation’ first, and the ‘great moderation’ then, the focus is on the DM/US dollar exchange rate, as a proxy of external constraints. A Taylor-type interest rate rule with a sufficiently high inflation coefficient emerges as an equilibrium relation in a Vector Error Correction model, and operates as a reaction function. The exchange rate enters significantly and the dynamics generated are consistent with the derived rule and the macroeconomic theory. Hence, I argue that the Bundesbank kept an eye on the exchange rate and remained devoted to the long-standing policy of price stability.

Suggested Citation

  • Eleftheriou, Maria, 2017. "Did the Bundesbank react to the US dollar exchange rate?," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 235-244.
    • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:235-244
    DOI: 10.1016/j.iref.2017.05.016
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    2. Eleftheriou, Maria & Kouretas, Georgios P., 2023. "Monetary policy rules and inflation control in the US," Economic Modelling, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Exchange rate; Taylor rule; Vector error correction model; Cointegration; Impulse response analysis; Germany;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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