THE EFFECTIVENESS OF MONETARY POLICY UNDER THE REGIME OF PEGGED EXCHANGE RATES: THE EXPERIENCE OF THE DEUTSCHE BUNDESBANK (GERMANY)

This dissertation analyses the effectiveness of monetary policy pursued by the Bundesbank during pegged exchange rates. The Bundesbank primarily relied on exchange controls to limit international capital flows, and on measures sterilizing these flows once they occurred.; The literature dealing with the German case is reviewed in Chapter I. This literature is separated into two groups. The first group deals with the estimation of the offset coefficient. Most of the studies in the first group estimated that offsetting capital flows had been almost complete. These studies are subject to serious shortcomings which led to upward biased estimates in the offset coefficients.; The second group deals with the effectiveness of capital controls. These studies estimated the effectiveness of capital controls only on particular items of the balance of payments. These approaches tend to overestimate the impact of control measures on the balance of payments as a whole, as they neglect the indirect, particularly offsetting, effects on other payment items.; The analytical framework for estimating the determinants of capital flows is developed in Chapter II. The model explicitly identifies the equilibrium conditions and constraints which are relevant in the short run. It also incorporates specifics of the German monetary system and its institutional arrangements.; The empirical evidence is presented in Chapter III. The use of the exogenous domestic component of the monetary base in conjunction with monthly data decreases the simultaneous equation bias present in previous studies and significantly lowers the estimated offset coefficient. The empirical evidence suggests that the Bundesbank was able to conduct a more independent monetary policy than was previously estimated.; Some of the statistical limitations of this study are addressed in Chapter IV. It is shown that the estimated offset coefficients might overestimate the degree of monetary independence of the Bundesbank since monetary policy actions were offset by internal transactions.; The investigation is extended in Chapter V. The effectiveness of the German capital control programs is estimated and it is shown that these control programs had no effect on capital flows.; This dissertation concludes in Chapter VI with a summary and suggestions for future research.