Disciplined discretion: the German and Swiss monetary targeting frameworks in operation

Many observers have held up the records of price stability in Germany and in Switzerland as examples of the benefits of a monetary targeting regime. These claims have been juxtaposed in recent years with econometric analyses of Bundesbank policy which have shown an absence of dependable relationship between money growth, inflation, and policy movements. We offer an analysis of actual Bundesbank and Swiss National Bank monetary policy as it operated which explains this puzzling gap between performance and presumed policy. We confirm that neither country is a monetary targeter according to a strict formal definition. We go further, however, and argue that these central banks used their targets as a framework for transparently signaling their intent and explaining their policies to their constituent publics. So used, these targets actually granted the two monetary targeters greater flexibility in responding to shocks and control problems than either idealized monetary targeters or low credibility central banks would have received. Furthermore, the inability to capture these central banks' monetary policies by a simple rule does not mean that there is no pattern to either policy. The close examination of the adoption, design, and operation of their monetary frameworks reveals a surprising similarity in often ignored practice. In this operational light, the difference between inflation targeting as adopted in a number of countries in recent years, and monetary targeting as practiced by its two most-cited successes appears to be very small.