A k-percent rule for monetary policy in West Germany

The concept of rules for monetary policy has been more and more critized in recent years. The Deutsche Bundesbank is also urged to give up monetary targeting. The idea is that the economic performance could be improved if monetary policy became more pragmatic and was more concerned about slow growth and high unemployment. In reality, however, monetary policy in the past decades has been highly unstable and has thus contributed to business cycle fluctuations and inflation. The intended policy oriented at the production potential has not been followed in West Germany. In this paper, a simple model is used to analyze what could have been expected from a rule similar to the one the Bundesbank has intended to pursue since 1974. The simulations for the period 1972-1987 show that strict application of a k-percent rule would have implied less pronounced cyclical fluctuations of domestic demand and a stable price level on average. This result contradicts the view that rules for monetary policy are useless or even counterproductive.