What Does the Bundesbank Target?

Although its primary ultimate objective is price stability, the Bundesbank has drawn a distinction between its money-focus strategy and the inflation targeting approach recently adopted by a number of central banks. We show that, holding constant the current forecast of inflation, German monetary policy responds very little to changes in forecasted money growth; we conclude that the Bundesbank is much better described as an inflation targeter than as a money targeter. An additional contribution of the paper is to apply the structural VAR methods of Bernanke and Mihov (1995) to determine the optimal indicator of German monetary policy: We find that the Lombard rate has historically been a good policy indicator, although the use of the call rate as an indicator cannot be statistically rejected.