SFB 303 Discussion Paper No. B - 324

Author: Neumann, M. J. M., and Hagen, Jürgen von
Title: The Strategy of Monetary Targeting: Can the German Experience Provide a Model for the ECB?
Abstract: This paper studies the Deutsche Bundesbank's concept of monetary targeting and discusses its merits relative to the Anglo-Saxon concept of direct inflation targeting. It is shown that monetary targeting is an effective device for anchoring medium-term inflation expectations. At the same time, this intermediate approach permits sufficient flexibility for leaning against the wind of currency appreciation and for responding to short-term events. Since there is no evidence that suggests that money demand will be unstable at European Level, it is argued that monetary targeting makes a suitable concept for the future ECB. Direct inflation targeting, in contrast, is likely to either prevent the ECB from gaining credibility or to require responding to price level shocks in an overly contractionary fashion.
Keywords:
JEL-Classification-Number: E52, E58
Creation-Date: July 1995
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