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.
  

