Monitory policy in Germany Bundsbank and great inflation

A Narrative Description of Bundesbank Policy
In this section we provide a selective review of Bundesbank policy over the post-Bretton Woods era. Our goal is to obtain narrative evidence on how the Bundesbank operates in practice. In the subsequent two sections, we supplement the narrative evidence with a formal statistical analysis.
It is useful to divide the review into four episodes: (1) 1973-1978, the immediate period after Bretton Woods was abandoned and the first major oil shock occurred; (2) 1979-1983, when the second major oil shock occurred and U.S. tightened monetary policy; (3) 198-1989, the era of stagnation and late recovery in West Germany; (4) 1990-1993, the early years of reunification. After a brief discussion of each episode, we summarize the key lessons about the conduct of Bundesbank policy.
To aid the discussion, we refer (often implicitly) to which plots CPI inflation, the growth rate of industrial production, and the day-to-day rate, all for Wes Germany. To provide a benchmark, the figure also plots the analogous variables for the U.S. economy. In addition, Figure 3 plots the behavior of both the real DM/dollar exchange rate, and the trade weighted exchange rate.
1973-1978
Shortly after it was freed from its obligations under Bretton Woods in early 1973, the Bundesbank raised short term interest rates dramatically in order to currently steadily rising inflation. On a number of occasions during this period it publicly pronounced a commitment to maintain a tight monetary policy until inflation was under control (Tsatorinas, 1993). Unfortunately, later in the year came the first major oil shock. Thus, despite a restrictive policy through most of 1973, inflation climbed above 7% by the end of 1974.
Though below the nearly double digit level reached in the U.S., this rate was clearly high by West German standards.
The Bundesbank continued to signal its intent to combat inflation. By the end of 1974, it had the system of inflation and monetary in fact. It announced a target rate of inflation for 1975 of 4.5 percent and a target rate of monetary growth of 8 percent. While these goals were ambitions, they nonetheless reflected a gradualist approach to reigning in inflation. As in the U.S., the combined force of the oil shocks and a restrictive monetary policy forced the economy into a deep recession. The severe downturn induced the Bundesbank to ease along with the Federal Reserve Board. It permitted both inflation and money growth to overshoot their targets by 1.5 and 2 % points, respectively. In particular, it reduced short term rates and then kept them low through most of the rest of the decade. While ex post real short term rates were above the negatives rates being recorded in the U.S., they were nonetheless clearly below the trend for the era.
After a brief expansion period, growth began to tail off in 1978. At this time the Bundesbank cited an appreciating mark to justify continued easing. In effect, the Bundesbank was easing rates to stimulate a softening real economy. While it not always so forthcoming, it has acknowledged that concern for the reel economy influenced its behavior over this period.