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¶ … Deutsche Bundesbank in the period leading up to and following reunification. The paper explores the bank's monetary policies and considers their effectiveness in achieving the Bundesbank's stated goals of maintaining price stability in the German economy. The paper also discusses the role of credibility in advancing the Bundesbank's monetary policies.
Created by the Deutsche Bundesbank Act of July 26, 1957, the German central banks' mission was to achieve price stability. The Bundesbank steered the German economy through the expected collapse of the Bretton Woods system of fixed exchange rates, at its heyday from 1959 through 1968 (Garber, 1993). When Bretton Woods ended in March 1973, the transition to floating exchange rates gave the Bundesbank new scope for controlling domestic monetary conditions. This change opened up new opportunities for monetary policy, to which Bundesbank responded by pioneering the use of pre-announced annual growth targets...
During the course of its existence, the Bundesbank pursued monetary targeting policies which experts and analysts have sometimes assessed as controversial and in some cases counterproductive.
In the early 1970s the Bundesbank had to contend with inflation as the predominant problem for monetary policy makers. On October 31, 1972 the Council of Ministers of the European Community passed a resolution outlining the concept of monetary targeting based on a quantity equation. From that point on, the use of quantity theory became the basis for monetary target setting in Germany (Posen, 1997).
Germany began adopting monetary targets in December 1974 with the announcement of a growth target by the Bundesbank Central Bank Council. The Bundesbank had used the central bank money stock as its primary indicator of monetary developments since 1973, but this announcement marked the first time that it identified a specific…
The Bundesbank pursued its mandate of safeguarding the currency through periods of inflation, recession and oil crisis over the next decade and a half. It was not until the reunification process started to take shape that a series of unprecedented challenges developed. As part of the reunification, the process of monetary union required that a conversion rate be established between the West German Deutschmark and the East German Mark. Fundamental differences existed between the Bundesbank and the West German government on two key issues: the pace at which the monetary union should proceed and the conversion rate between currencies (Morys, 2003).
The Bundesbank favored a gradual step-by-step approach to economic convergence to allow for time to enhance economic conditions in East Germany. However, their views were in conflict with those of the West German government, which wanted to expedite introducing the Deutschmark into East Germany as soon as possible. The Bundesbank, more concerned with the currency's stability, favored a conversion rate that would not cause inflation. Because of their concern for potentially inflationary consequences, the German central bank initially rejected the conversion rate suggested by the West German government, sparking a contentious and public conflict that lasted for several months (Morys, 2003).
The Bundesbank believed that the weak East German currency was symptomatic of an economy plagued by low productivity levels, no free competition or price mechanism, and no concept of private ownership. Consequently they did not believe that monetary union would solve these problems. Most economists agreed with the Bundesbank that a
" (ECB, 2007) Operational efficiency is held to be the most important of all the principles of operation for the ECB and can be defined as "the capacity of the operational framework to enable monetary policy decision to feed through as precisely and as fast as possible to short-term money market rates. These in turn, through the monetary policy transmission mechanism, affect the price level." (ECB, 2007) Equal treatment and harmonization
This suggests that fine-tuning the model may be required in order to identify optimal approaches. For instance, Gionnani and Woodford add that, "It is only if we ask whether the same policy continues to be optimal when we vary the statistical properties of the disturbances that we can hope to find an advantage of one representation of the policy rule over the other (1427). Gionnani points out that rather than
(Minford; Walters, 2004, p. 306) (xii) Competition to the U.S. dollar: In the likelihood of UK joining the EMU and adopting the single currency, the threat posed by the only international competitor to the U.S. dollar, the euro, would become real. Therefore, the U.S., at least would not encourage such a move and witness a downturn to its currency, the only true international currency. (Minford; Walters, 2004, p. 306) However,
Eurozone Maastricht Treaty Euro zone Treaty The European Community established the convergence criteria. These criteria was established in order to allow its EU Member states to take part in the Euro Zone, and using the Euro, as an official currency. The members of the European Union formed the Maastricht Treaty in 1992. The principle goals of the treaty were to establish an economic and monetary union, strengthen the democratic legitimacy of its
Under the arrangement, moreover, a country with efficient production and a favored competitive position (including as enhanced by new capital goods) is rewarded with rising income and reduced unemployment. No grand scheme of state or international planning and direct control is required. Exchange rates are for the most part fixed under the classical gold-flows mechanisms (say, $/£ const. within fixed limits), as stated, and adjustments to trade imbalances
Americans receive two to three weeks of paid vacation per year, while Europeans receive between 5 and 7 weeks. In addition, the U.S. has generally 8 paid holidays per year; the comparable figure for Europe is 12 to 18 days (holidays such as Easter and Christmas, plus national days and even the Queen's Birthday in the Netherlands). As a result, Americans average only 10.2 vacation days per year (Zuckerman).