OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 58,4(1996) 0305-9049 AN EMPIRICAL ANALYSIS OF THE CHANGING ROLE OF THE GERMAN BUNDESBANK AFTER 1983 Katarina Juselius I. INTRODUCTION Juselius (1992) found that the Danish price inflation in 1975:1-1987:3 to a large extent was imported (with Germany representing the foreign influence), whereas the domestic effects from excess wages or excess money were much less influential. This result was confirmed in Juselius (1996), where the monetary explanation to price inflation was examined in more detail based on an extended sample 1975:1-1993:4. The results prompt the question whether, as is often claimed, German monetary policy determines price inflation within Europe. This presupposes, of course, that German price inflation is a monetary phenomenon. The focus of the present paper is to test this presupposition by analyzing the monetary mechanisms in Germany and their effect on price inflation over the sample period 1975:2-1994:4. The empirical analysis indicated a fundamental shift in the structure of the model around 1983, so the model analysis is done separately before and after that date. The reunifi- cation of East and West Germany adds another important regime shift in the second period. The empirical model describes a macroeconomic system of money, income, prices, and interest rates within which three steady-state relations are identified. They describe an aggregate demand/supply for money relation, an aggregate income relation, and an interest rate relation. To examine the effect of monetary policy measures on price inflation, special attention is paid to the dynamics of the adjustment process and to the interaction and feedback effects within the system. ML-estimates of both the long-run steady-state relations and the corresponding common trends are discussed in terms of similarities and dissimilarities between the two periods. The finding here that the model Financial support from the Social Sciences Research Council is gratefully acknowledged. Helpful comments from an anonymous referee, Martin Browning, David Hendry, Henning Tarp Jensen, Jurgen Wolters, and participants at seminars in Berlin, Copenhagen and Aarhus are gratefully acknowledged. Henning Tarp Jensen has provided valuable research assistance. 791 © Blackwell Publishers 1996. Published by Blackwell Publishers. 108 Cowley Road, Oxford 0X4 uF, UK & 238 Main Street, Cambridge, MA 02142, USA.