| Since World War One, Germany has been characterized as an inflation hawk. Over the past two decades, the German economy has experienced among the lowest inflation rates of any industrialized country. Using Taylor's Rule, and data obtained from the International Monetary Fund as well as the German Statistical Office, a case for flexible inflation targeting is made over the period of 1975 to 2003. Sensitivity of the Bundesbank to inflation deviations from target and output gap movements is presented. It is shown that the Bundesbank does use interest rates to actively combat inflation, and to a lesser extent the output gap. Additionally, the Fisher Hypothesis is applied to coefficient estimates to obtain the implicit real rates of interest. These real interest rates are compared to the German output gap to further support a flexible inflation targeting relationship. |
