BUNDESBANK CALLS FOR CENTRAL BANK COOPERATION
Bundesbank board member Claus Koehler
called on central banks of major industrialised nations to
cooperate closely on exchange and interest rate policies.
    In a lecture at the University of Surrey, pre-released
here, Koehler said that the only alternative to cooperation was
protectionism and control on capital movements.
    "Central banks have sufficient experience of exchange market
transactions to steer exchange rates where they want to have
them," he said. He added that West German growth forecasts would
have to be revised downward because of the recent dollar drop
to 1.80 marks from above two marks at the start of 1987.
    Koehler said that transactions on foreign exchange markets
had parted company with transactions in goods, services and
investments. It was the scale of speculative transactions that
determined market trends.
    Speculative inflows could cause monetary aggregates to
grow. To reverse such a rise in the money stock, interest rates
would have to be lowered to allow funds to drain off.
    "In other words, the monetary policy measures required are
different from -- and sometimes diametrically opposed to --
those needed when the money stock is increasing as a result of
mounting economic activity," Koehler said.
    The dollar fall was one means of reducing the massive U.S.
Current account deficit. But attempts to keep the depreciation
going by talking the dollar down posed problems.
    The sharp drop of the dollar had led to an immediate steep
rise in the cost of U.S. Imports and a sharp fall in the cost
of European imports. But the volume effect of falling imports
to the U.S. And rising imports to Europe would take time to
make itself felt compared with the price effect.
    "Hence the depreciation of the dollar may well be going
further than would be necessary to adjust the current account
over the medium term," Koehler said.
    A reduction in the U.S. Current account deficit would occur
only if the growth rate of GNP was higher than domestic demand.
In Japan and West Germany by contrast, domestic demand should
rise faster than GNP.
    "In Germany this did indeed happen in 1986," Koehler said.
    If a further appreciation of the dollar was to be
prevented, the U.S. Current account deficit could be offset by
an inflow of foreign funds into the U.S..
    But only if there was an appropriate interest rate
differential would Europe and Japan look for financial
investment in the U.S.
    When selecting monetary policy instruments, a central bank
had to pay greater heed than in the past to the impact its
measures might have on expectations and consequent decisions.
    Koehler said the Bundesbank was changing money market rates
by operating on the open market rather than adjusting leading
interest rates because of the signal this gives to the market
and its substantial impact on exchange rates.
    It was not only important to achieve the domestic goals of
price stability, economic growth and full employment but also
to tackle international problems like the exchange rate
problem, the debt problem and the current account problem.
    A strategy had to be designed that helped "the safeguarding
of non-inflationary economic growth in an international
monetary system largely free of disruptions," Koehler said.
    Given the system of floating exchange rates, it was
necessary for central banks to agree to intervene. It sufficed
to tell the market where central banks saw exchange rates over
the next few years and intervention points should not be set,
because they were only testing points for the market, he said.
    In order to keep the international monetary system free of
disruptions central banks should not only intervene jointly but
also cooperate on interest rate policies, Koehler said.
 REUTER
