Rules, Discretion, and Central Bank Independence: The German Experience 1880-1989 / Bernhard Eschweiler, Michael D. Bordo.

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Eschweiler, Bernhard

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4547.Publication details: Cambridge, Mass. National Bureau of Economic Research 1993.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: Theories of rules and discretion suggest that monetary policy rules are first best in terms of social welfare. However, if commitment is not feasible, delegating monetary policy to an independent and conservative central bank can be second best. Monetary policy in Germany during the past one hundred years provides an excellent case to assess the empirical evidence on the use of rules and central bank independence in monetary policy making. Since the creation of a central monetary authority in 1876, Germany has participated in four monetary regimes: the pre-war gold standard, the inter-war gold standard, the Bretton-Woods system, and the floating exchange rate regime. The bottom line of our analysis is that monetary policy in Germany was always geared toward maintaining price stability with the exception of the two world war periods. Germany relied both on rules and discretion with central bank independence to achieve the goal of price stability. A comparison of the Classical Gold Standard regime with the floating exchange rate regime suggests that society under the floating exchange rate regime with central bank independence was better off. However, this comparison ignores the historical difference in output shocks and the possibility that society became more inflation averse over time.

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Previous	nber w4544 Term, Inflation, and Foreign Exchange Risk Premia: A Unified Treatment /	nber w4545 Short-run and Long-run Expectations of the Yen/Dollar Exchange Rate /	nber w4546 A Comparison of the United States and Canadian Banking Systems in the Twentieth Century: Stability vs. Efficiency? /	nber w4547 Rules, Discretion, and Central Bank Independence: The German Experience 1880-1989 /	nber w4548 Labor Adjustment Under Different Institutional Structures: A Case Study of Germany and The United States /	nber w4549 Econometric Estimates of Prices Indexes for Personal Computers in the 1990s /	nber w4550 The Gender Gap, Fertility, and Growth /	Next

November 1993.

Theories of rules and discretion suggest that monetary policy rules are first best in terms of social welfare. However, if commitment is not feasible, delegating monetary policy to an independent and conservative central bank can be second best. Monetary policy in Germany during the past one hundred years provides an excellent case to assess the empirical evidence on the use of rules and central bank independence in monetary policy making. Since the creation of a central monetary authority in 1876, Germany has participated in four monetary regimes: the pre-war gold standard, the inter-war gold standard, the Bretton-Woods system, and the floating exchange rate regime. The bottom line of our analysis is that monetary policy in Germany was always geared toward maintaining price stability with the exception of the two world war periods. Germany relied both on rules and discretion with central bank independence to achieve the goal of price stability. A comparison of the Classical Gold Standard regime with the floating exchange rate regime suggests that society under the floating exchange rate regime with central bank independence was better off. However, this comparison ignores the historical difference in output shocks and the possibility that society became more inflation averse over time.