Rules, Discretion, and Central Bank Independence: The German Experience 1880-1989

59 Pages Posted: 24 Jul 2007

See all articles by Bernard eschweiler

Bernard eschweiler

affiliation not provided to SSRN

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 1993

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.

Suggested Citation

eschweiler, Bernard and Bordo, Michael D., Rules, Discretion, and Central Bank Independence: The German Experience 1880-1989 (November 1993). NBER Working Paper No. w4547. Available at SSRN: https://ssrn.com/abstract=382145

Bernard Eschweiler (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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