GERMAN INSTITUTES WARN ON MONEY SUPPLY
Four of West Germany's five leading
economic research institutes warned that excessive monetary
growth threatened a resurgence of inflation.
    But in a dissenting view the DIW institute in West Berlin,
echoing recent statements by leading Bundesbank officials, said
the expansion seen over the last 1-1/2 years did not
necessarily threaten stability.
    The five institutes issued a joint spring report, in which
three -- Kiel, Hamburg and Essen -- forecast a two pct rise in
GNP in 1987, while West Berlin and Munich predicted one pct.
    The four institutes said an expansive policy was welcome in
view of the slowdown in economic activity. But experience has
shown that strong monetary growth eventually leads to a price
rise which undoes the beneficial effects of monetary policy.
    Given virtual zero inflation in West Germany such fears may
seem exaggerated, they said.
    "But it has often turned out in the past that the price
climate can quickly deteriorate, forcing the central bank into
a restrictive policy," they said.
    The economic costs of a preventive stability policy are
less than fighting inflation once it has taken hold, they said.
    The four institutes disputed the view that monetary
expansion would slow of its own accord in 1987 as domestic
investors switch liquidity into longer term capital market
investments following lower interest rates.
    "Such redispositions may temporarily dampen the expansion of
central bank money stock, but do not automatically lead to a
smaller expansion of money supply," they said.
    A return to growth and stability did not require
spectacular central bank moves, but could be done quietly with
open market operations and repurchase pacts, which would avoid
an interest rate rise by dampening inflationary expectations.
    The DIW institute said monetary policy should not be
focused simply on growth of production potential. Because of
uncertainty about exchange rate developments and economic
weakness other factors should be taken into account.
    Monetary policy should aim for further interest rate cuts
and avoid rises to boost the economy and discourage revaluation
speculation. Recent strong monetary expansion was not a threat
in itself to price stability.
    The 1979/81 inflation following strong 1977/78 money growth
reflected other causes, such as rising oil prices and the
falling mark.
 REUTER
