WHAT DOES THE BUNDESBANK TARGET

Although its primary ultimate objective is price stability, the Bundes bank has drawn a distinction between its money-focused strategy and th e inflation targeting approach recently adopted by a number of central banks. We show that, holding constant the current forecast of inflati on, German monetary policy responds very little to changes in forecast ed money growth; we conclude that the Bundesbank is much better descri bed as an inflation targeter than as a money targeter. An additional c ontribution of the paper is to apply the structural VAR methods of B. Bernanke and I, Mihov (Measuring monetary policy, working paper no. 51 45, National Bureau of Economic Research, Cambridge, MA, June 1995) to determine the optimal indicator of German monetary policy: We find th at the Lombard rate has historically been a good policy indicator, alt hough the use of the call rate as an indicator cannot be statistically rejected. (C) 1997 Elsevier Science B.V.