How the Bundesbank really conducted monetary policy
Papers estimating the reaction function of the Bundesbank generally find that ist monetary policy from the 1970s to 1998 can well be captured by a standard Taylor rule according to which the central bank responds to the output gap and to deviations of inflation from target, but not to monetary growth. This result is at odds with the BundesbankÂ´s claim that it followed a strategy of monetary targeting. This paper analyses whether this apparent contradiction is due to (a) the use of ex post data which do not necessarily match policy makersâ€™ real-time information sets and (b) the omission of important explanatory variables. Accordingly, we compile a real-time data set for Germany including the Bundesbankâ€™s own estimates of potential output and use it to reestimate the Bundesbankâ€™s reaction function. We find that the use of real-time data considerably changes the results. Moreover, when adding the change in the output gap as well as deviations of money growth from target to the set of explanatory variables, we find that both variables are highly significant. This suggests that the Bundesbank took its monetary targets seriously, but also responded to deviations of expected inflation and output growth from target
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Volume (Year): 16 (2005)
Issue (Month): 3 (December)
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