Did the Bundesbank Target Monetary Expansion or Inflation? Evidence from Monetary Base Growth

Several empirical studies have suggested that the Bundesbank has pursued inflation targets rather than monetary targets. These studies have been criticized because they do not adequately measure the deviation from target and because they use some short term interest rate as a measure of the Bundesbank's policy actions instead of the comprehensive measure, the monetary base adjusted for changes in reserve requirements. We find that, in the period from 1979 III to 1998 IV, changes in adjusted monetary base growth reacted negatively and significantly to deviations from target monetary expansion as measured relative to the nearest margin of the target band if, and only if, no control variables are added. With our control variables, the significance of this coefficient drops to 10 percent. By contrast, deviations of the inflation rate from the inflation objective used to derive the money supply target never has any significant effect on changes in adjusted monetary base growth. This result holds regardless of whether the lagged or the currently expected inflation rate is employed. The results are consistent with money supply targeting (if anything) but not with inflation targeting