Year:    1975

Author:    Neumann, Manfred J. M.

Credit and Capital Markets – Kredit und Kapital, Vol. 8 (1975), Iss. 3 : pp. 317–345

Abstract

Constructs of the Monetary Base

The German Bundesbank has founded its “new monetary policy” on a delimitation of the monetary base which differs in important points from all definitions hitherto used in the literature on monetary theory. In this study, a comparative, critical analysis of the construct developed by the Bundesbank is undertaken. In the first part of the study, to begin with the most usual definitions of the monetary base are derived in an analytically comparable manner and their theoretical foundations are discussed. In particular, the simple monetary base, the extended, and the adjusted monetary base are dealt with. For all their difference, the constructs mentioned adhere to the common basic idea of undertaking a condensation of the sources of monetary liabilities of the monetary authorities that is appropriate to the given problem. In a second part, the construct of the Bundesbank is analysed. The principle of its design is a selective compilation of certain uses of central bank money. 'The construct of the Bundesbank differs from other definitions of the monetary base in the following points: 1. Excess reserves on central bank accounts and minimum reserves for foreign deposits are treated, not as central bank money, but as sources of central bank money. The minimum reserves for domestic deposits are calculated, not on the basis of the prevailing minimum reserve rates, but on the basis of arbitrarily assumed, constant reserve rates. "The reasons advanced by the Bundesbank for its particular method are critically discussed in detail. In conclusion it is shown that, compared to other definitions of the monetary base, the Bundesbank’s construct is not suitable either to give a reliable indication of the course of monetary policy at a given time or to serve as an intermediate target variable for monetary policy. Its use as an intermediate target variable is rendered more difficult by the fact that numerical target specifications for the growth of the Bundesbank’s construct cannot be translated ex ante into numerical target specifications for the net acquisition of assets by the Bundesbank.