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A k-percent rule for monetary policy in West Germany

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  • Scheide, Joachim
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    Abstract

    The concept of rules for monetary policy has been more and more critized in recent years. The Deutsche Bundesbank is also urged to give up monetary targeting. The idea is that the economic performance could be improved if monetary policy became more pragmatic and was more concerned about slow growth and high unemployment. In reality, however, monetary policy in the past decades has been highly unstable and has thus contributed to business cycle fluctuations and inflation. The intended policy oriented at the production potential has not been followed in West Germany. In this paper, a simple model is used to analyze what could have been expected from a rule similar to the one the Bundesbank has intended to pursue since 1974. The simulations for the period 1972-1987 show that strict application of a k-percent rule would have implied less pronounced cyclical fluctuations of domestic demand and a stable price level on average. This result contradicts the view that rules for monetary policy are useless or even counterproductive.

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    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 337.

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    Date of creation: 1988
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    Handle: RePEc:kie:kieliw:337

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    1. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(2), pages 141-163, September.
    2. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
    3. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 29(1), pages 173-203, January.
    4. Scheide, Joachim, 1984. "Geldpolitik, Konjunktur und rationale Erwartungen," Open Access Publications from Kiel Institute for the World Economy, Kiel Institute for the World Economy (IfW) 378, Kiel Institute for the World Economy (IfW).
    5. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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    Cited by:
    1. Langfeldt, Enno & Scheide, Joachim & Trapp, Peter, 1988. "Is money supply targeting obsolete?," Kiel Working Papers 338, Kiel Institute for the World Economy.

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