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Central bank interest rates

Upon taking office in October 1993, the Bundesbank's new president, Hans Tietmeyer, said, "Forced reductions in central bank interest rates which are contrary to stability policies can neither solve economic or structural problems. But they would undermine trust in currency values, drive long-term interest rates higher and delay necessary corrections in the real economy." Explain the context in which Mr. Tietmeyer made these comments. Do you agree or disagree with his comments. Explain.

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Mr. Tietmeyer was responding to a chorus of complaints following the currency crisis of August 1993 which, in turn, led to the abandonment of the Exchange Rate Mechanism. The August crisis was triggered by the (correct) belief ...

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