A State within the State? An Event Study on the Bundesbank

The Bundesbank is often regarded as a very independent central bank. Its formal independence does not imply, however, that the BuBa operates in a political vacuum. This paper analyses certain periods in the history of the Bundesbank taking into account determinants of central bank independence outlined in the literature. We conclude that many such determinants (notably public opinion and political instability) played indeed a role in the making of the Bundesbank Law of 1957. Still, it was mainly the unresolved issue of federalism that helped the Bundesbank to save its autonomy granted by the Allies in 1948. The Bundesbank and the federal government had quite a number of conflicts about monetary policy during the 1960s, which are analysed in the paper tapping various sources, including unpublished minutes of the Governing Council of the Bundesbank. It is concluded that in conflicts about interest rate policy the BuBa 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. Another important conclusion is that the theory on (determinants of) central bank independence overlooks that the government and the Bundesbank were not two monolithic entities, but were often divided in themselves, which provided the Bundesbank with room of manoeuvre that it skilfully exploited.