Endogenous Money and Interest Rates in Germany

The policy of monetary targeting in Germany seems to be in crisis. Being on the horns of the dilemma: the substantial overshooting of the growth rate of M3 on the one hand, and the impossibility of raising short term interest rates in the face of a impending recession and the exchange rate constraints imposed by its leading role in the EMS on the other, the Bundesbank has to shift away from its ‘pragmatic monetarism approach’. Besides so called ‘special developments’, as interventions in the EMS, fiscal policy, wage policy, interest rate subsidies in Eastern Germany and the widespread use of DM-bills in Eastern Europe, the question arises, whether there are more fundamental reasons for the obvious failure of the control of monetary aggregates. Moreover it might be asked, whether some of these ‘special developments’ are in no way special but constitutional elements of a transmission channel quite different from the one, on which the ‘pragmatic monetarism approach’ of the Bundesbank is based. Theory of science tells us, that a theory, which explains reality essentially not by its rules, but by its exceptions, should be revised.