Money Stock Control and Inflation Targeting in Gennany

Transcription

1 Money Stock Control and Inflation Targeting in Gennany

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3 Claus Brand Money Stock Control and Inflation Targeting in Germany AState Space Modelling Approach to the Bundesbank's Operating Procedures and Intermediate Strategy With 24 Figures and 26 Tables Springer-Verlag Berlin Heidelberg GmbH

4 Series Editors Wemer A. Müller Martina Bihn Author Dr. Claus Brand European Central Bank Kaiserstraße Frankfurt a.m. Gennany This book was submitted as a doctoral dissertation to the Universität GH Essen, Gennany, in 1999 ISSN ISBN Cataloging-in-Publication Data applied for Die Deutsche Bibliothek - CIP-Einheil~aufnahme Brand, Claus: Money stock control and inflation targeting in Gennany: astate space modelling approach to the Bundesbank's operating procedures and intennediate strategy; with 26 tables 1 Claus Brand. - Heidelberg; New York: Physica Verl.,2001 (Conlributions to economics) Zugl.: Essen. Univ., Diss. ISBN DOI / ISBN (ebook) This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned. specifically the rights of translation, reprinting. reuse of illustrations. recitation. broadcasting. reproduction on microfilm or in any other way. and storage in data banks. Duplication of this publication or parts thereof is pennitted only under the provisions of the Gennan Copyright Law of September in its current version. and pennission for use must always be obtained from Physica-Verlag. Violations are liable for prosecution under the German Copyright Law. Springer-Verlag Berlin Heidelberg 2001 Originally published by Physica-Verlag Heidelberg NewYork in 2001 The use of general descriptive names. registered names. trademarks. eie. in this publication does not imply. even in the absence of a specific statement. that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Softcover Design: Erich Kirchner. Heidelberg SPIN / I 0 - Printed on acid-free paper

5 Contents 1. Introduction Intermediate strategies for monetary policy The role of the Bundesbank The methodological framework Measuring monetary policy: Operating procedures and intermediate strategies The conduct of monetary policy in Germany The practice of monetary targeting The development of instruments for monetary control Operating procedures and money supply A note on the identifiability of money demand The identification problem Money demand and monetary policy rules Tracing the supply side using bank reserves? A note on the identifiability of autonomous monetary policy actions Common identification problems in VARs Identifying monetary policy regimes Narrative approaches Unresolved issues Evidence from recent empirical analyses of German monetary policy Was there no role for monetary aggregates in Germany? Did the Bundesbank pursue a Lombard rate regime? Theoretical framework Basic considerations Interest rate operating procedure (from 1985 on) An alternative approach: reserves targeting Discount window borrowing procedure ( ) Concluding remarks

6 VI Contents 4. Analysis of time series using linear state space models..., Basic concepts..., Common approaches to multivariate time series analysis The system theoretic approach Filtering and smoothing The linear state space model Specific properties of the linear model Innovation state space representation Linear state space models and time series models Minimality Signal extraction using the Kalman filter Filtered forecasts Smoothed forecasts The use of the Kalman filter in econometrics Structural analysis Impulse-responses to orthogonal innovations Impulse-responses to non-orthogonal innovations using a Wold-ordering scheme Impulse-responses to non-orthogonal innovations: Beyond the Wold-ordering scheme The forecast error variance decomposition Distribution of impulse-response functions Model selection and estimation The model building algorithm... " Salient features of the algorithm as compared with VARs Model specification tests Modelling nonstationary time series and common stochastic trends Detrending and common trend representation in econometrics Modelling trend and cycle A useful generalisation for cointegrated time series..., Properties of the decomposition into permanent and transitory components Empirical implementation and results Is a multiplier approach adequate to model German money supply? Data Results Monetary targeting and the business cycle Data Results A quantity theory based approach to inflation targeting Money stock control and inflation targeting

7 Contents VII The po approach Data and results Conclusions Methodological remarks... : Money stock control and the day-to-day conduct of monetary policy Money stock control and inflation targeting in Germany Prospects for the ECB's monetary policy strategy List of figures List of tables Bibliography A. GAUSS-prograDlS A.1 Estimation of balanced state space model A.2 Obtaining in-sample forecasts using the Kalman filter A.3 Calculation of impulse-responses A.4 Calculation of forecast-error variance decompositions A.5 Decomposition of Error Variance-Covariance-Matrix Ll A.6 Aoki C-Test for model specification

8 List of figures 2.1 Inflation and the development of the German overnight money market rate (monthly: ; dotted line: overnight rate; solid line: annual change in consumer price index.) Development of M3 (monthly: ) Development of West German GDP - (quarterly, in prices of 1991, ) Development of GDP for unified Germany - (quarterly, in prices of 1991, ) Development of the German Lombard, discount and overnight money market rate Development of Lombard and discount loans and credit via REPOs Graphical representation of model (4.3)-( 4.4} Graphical representation of system (4.10), (4.11) in innovation form The Kalman filter Impulse-responses from money market model: Forecast error variance decomposition from money market model: Impulse-responses from money market model: Forecast error variance decomposition from money market model: Impulse-responses from money market model: Forecast error variance decomposition from money market model: Impulse-responses from general model: Impulse-responses from general model: Impulse-responses from general model: Impulse-responses from general model: Capacity utilisation: V Velocity of German M3: V GDP deflator and P*: V Impulse-responses for price gap and overnight rate from state space representation: V Impulse-responses for price gap and overnight rate from VAR representation: V

9 List of tables 2.1 Monetary targets of the Deutsche Bundesbank Interaction among the variables under an interest rate rule Interaction among the variables under a reserves targeting procedure Interaction among the variables under the discount borrowing rule Singular values of trend part for small model ( ) Ratios of singular values of trend part for small model ( ) Residual diagnostics: Trend part of model for subperiod Singular values of cyclical part for small model ( ) Ratios of singular values of cyclical part for small model ( ) Residual diagnostics: Joint model for subperiod Model parameter estimates ( ) Model parameter estimates ( ) Residual diagnostics for subperiod Model parameter estimates ( ) Residual diagnostics for subperiod Model parameter estimates ( ) Residual diagnostics for subperiod Forecast error decomposition: Model parameter estimates ( ) Residual diagnostics for subperiod Forecast error decomposition: Parameter estimates and residual diagnostics: State space implementation of P* -model for West-Germany ( lV) Parameter estimates and residual diagnostics: State space implementation of P*-model for unified Germany ( IV) Variance decomposition from state space implementation of P*- model Parameter estimates and residual diagnostics: State space implementation of P*-model for unified Germany ( IV) Variance decomposition from Bundesbank-reaction-function