A State Within the State? An Event Study on the Bundesbank (1948–1973)

In this paper we analyse certain periods in the history of the Bundesbank concentrating on the determinants of central bank independence as suggested in the literature. The Bundesbank law of 1957 was born only after a long and tedious political process which outcome was initially not at all clear. It is concluded that some determinants outlined in the literature played indeed a role in the making of the Bundesbank Law of 1957. Still, the Bundesbank was put in charge of the Dmark by the Allieds and this proved to be advantagous for the new institution, as was the subsequent debate about federalism. We argue that popular backing is one of the important forces in support of the Bundesbank's independence. However, this support is not exogenous, as the Bundesbank has always tried to influence public opinion. Our analysis of the conflicts between the Bundesbank and the federal government over monetary policy suggest that if a conflict concerned interest rate policy, the Bundesbank always got its way. Even with respect to exchange rate policy, which is primarily in the realm of the federal government, the position of the Bundesbank often prevailed, as the Bundesbank behaved skilfully. The history of the Bundesbank also provides ample evidence of coordination problems with fiscal policy that may arise with two independent players. Finally, it is clear that the theory on the determinants of central bank independence overlooks that very often the government and the Bundesbank were not two monolithic entities, but that there were different views about policy.