Editorial
Reports
Calendar of Monetary and Economic Highlights
Economic Outlook for Austria from 2000 to 2002 Spring 2000
Money and Credit in the First Quarter of 2000
Balance of Payments in 1999
Studies “The Monetary Policy of the Eurosystem”
Monetary Policy and Monetary Policy Strategy in EMU: New Framework − New Challenges
One and a half years after the changeover to Stage Three of Monetary Union, one of the central questions about monetary policy is how the new system of a single European monetary policy and the institutions created for this system operate in practice. The changeover involved much fewer uncertainties and difficulties for monetary policy than many people had expected. Moreover, the Eurosystem tackled a range of monetary policy challenges during these 18 months while successfully pursuing its prime objective of price stability. This shows that opting for a monetary policy strategy which pragmatically blends elements of money and inflation targeting was the right decision. However, those monetary policy issues pertinent to EMU that are given broad media coverage these days must not obscure more fundamental international monetary policy challenges. The danger of the liquidity trap in Japan, the risks of asset price bubbles in the U.S.A. and the possible existence of a New Economy are examples of challenges that monetary policy has to face worldwide at the start of the new millennium.
The Credibility of the Eurosystem
The Eurosystem is seeking to achieve credibility for its monetary policies. The Eurosystem is not bound in its monetary strategy to any explicit rules, nor is it subject to optimal contracts like those often recommended by the academic literature. Inevitably, its credibility after the first year of operation primarily takes the form of reputation, that is, credibility without binding mechanisms. The Eurosystem is attempting to establish a reputation on the basis of institutional independence and clear monetary objectives. The hope is that economic success in the initial phase will rapidly generate the necessary trust on the part of the population, agents on financial markets and politicians. The system will thereafter have an incentive not to lose the confidence thus acquired. Its reputation is inherently fragile, and does not necessarily represent a sufficiently binding policy commitment. The question as to the sustainability of this form of credibility is therefore the subject of a public debate, and of an academic controversy reflected in the literature. The paper argues that institutional factors such as greater transparency and accountability, and friction-free coordination with other policies could contribute to increased credibility. The credibility of monetary policy, which is inseparable from that of economic policy as a whole, would be less crisis-prone as a result.
Monetary Growth during the Changeover to Economic and Monetary Union
The monetary policy strategy of the Eurosystem assigns a prominent role to money. Monetary growth has been above the reference value since the changeover to Stage Three of EMU, which on the one hand gives rise to the concern that a monetary overhang posing a potential inflationary risk has accumulated. On the other hand, it is assumed that monetary growth may have been distorted upward in 1999 by special factors which had only a temporary impact on monetary growth. Within the framework of an outlier adjustment procedure, both the data-generating process of monetary growth and the location and dynamic pattern of various special factors affecting monetary growth are identified endogenously. Time series analysis identifies a so-called innovational outlier for all monetary aggregates − M1, M2 and M3 − in January 1999. The innovational outlier increased monetary growth not just temporarily in 1999 (by 1.3 percentage points), but permanently after February 2000 (by 0.5 percentage point). The reason for the long-term “EMU effect” on M3 growth can be determined only by means of an analysis using a structural model.
Indicators for Assessing Price Changes
This article discusses a number of key indicators forming part of the second pillar of the Eurosystem’s monetary policy strategy and explains both their effects on inflation and their leading indicator properties. No statements can be made, however, regarding the extent to which these indicators are taken into account in monetary policy decision-making and the weights assigned to them in this context. The need for a broad-based analytical approach in preparing the basis for monetary policy decisions in the EMU is demonstrated.
Estimate and Interpretation of the Taylor Rule for the Euro Area
This study presents the estimation results for the application of a Taylor rule to euro area aggregates and discusses to what extent the monetary policy of the Eurosystem deviates from that of the EMS prior to January 1, 1999. Empirical evidence suggests that the monetary policy of the euro area is adequately characterized by a modified Taylor rule. No statistically significant evidence of a difference between the monetary policy before and after the begin of Stage Three of Monetary Union was found. It must be noted that the results were obtained on the basis of restrictive assumptions (constant real equilibrium interest rates, specific levels of real equilibrium interest rates), that problems were encountered with the empirical implementation (determination of potential output growth, choice of the price index) and, last but not least, that only a limited amount of data have become available since the beginning of Stage Three of EMU. Because the results are difficult to calculate and hence laden with uncertainties and because a normative interpretation of the results must be taken with a grain of salt, the Taylor rule can serve as an aid in assessing monetary policy, but it cannot serve as the sole basis for monetary policy decisions.
Modifications to the Monetary Policy Framework and Structural Changes in the Austrian Money Market in Stage Three of EMU
The operational framework for the implementation of monetary policy in Stage Three of Economic and Monetary Union consists of open market operations and standing facilities.
Most Eurosystem liquidity is provided to credit institutions through weekly tender procedures (main refinancing operations conducted with a maturity of two weeks), with monthly tenders (longer-term refinancing operations with a maturity of three months) providing the bulk of the remainder. Those two types of regular reverse transactions may be supplemented by nonregular fine-tuning and structural operations. This category of instruments includes quick tenders, foreign exchange swaps, the collection of time deposits, outright transactions and the issuance of ECB debt certificates. With the aim of stabilizing market rates, credit institutions in the euro area are required to hold minimum reserve balances (set at 2% of all deposits and of debt issued with a maturity of less than two years, excluding repos and interbank liabilities) which are remunerated at the average of the rate for main refinancing operations over the maintenance period. The money market has shown a marked degree of integration for unsecured transactions. This has also changed the size of deals and business partners for Austrian banks. The secured segment of the market, by contrast, still has room for further integration.
Studies
Venture Capital in Austria
Venture capital employed for young enterprises’ startup financing and early-stage expansion accounts for just a minor share of the investments which provide important stimuli for innovation, growth and employment. Innovative small and medium-sized enterprises (SMEs) are one of the main engines driving growth and employment across Europe. In Austria, the venture capital market is still relatively small by international standards, yet it has been gaining considerable momentum in the past few years − not least owing to the fact that the focus of assistance schemes has shifted from debt financing towards equity capital. Differences evident in the investment structures in Austria and Europe as a whole may serve as an indicator of future developments on the equity front: In 1998, private households held merely 8% of the shares issued in Austria. The banks’ predominant role in the Austrian venture capital market is reflected by their substantial holdings of shares issued by corporations in general. Moreover, by international comparison, institutional investors play a subordinate role, which, to a significant extent, is no doubt attributable to the structure of the Austrian pension insurance system. The study shows that Austrians have a keen interest in risk capital, both on the part of issuers and investors.
Risk Analysis of a Representative Portfolio of International Assets
Based on time series analysis, this study examines the risk inherent in a representative portfolio. The portfolio comprises shares from North America, Asia Pacific, Eastern Europe and the euro area. It also includes German government bonds. To measure risk, a Capital Asset Pricing Model (CAPM) based on a multivariate GARCH structure is estimated. The most important finding is that the risk of the assets examined is distinctly time dependent, with the Eastern European shares fluctuating most sharply. Also, the risk measures studied reflect the lasting impact the Russian financial crisis had on capital markets. The modified model presented in the study reproduces the time dependence of the variances in nine out of ten cases. Evaluating the model by risk management standards attests to the good fit of the model, whose VaR estimates plot the actual losses correctly through time. Covariance forecasting concludes the empirical exercise. It is evident that only the GARCH covariance does not show a systematic forecasting error.
Calculating the Thresholds for the Notification of Mergers of Banks − The New Legal Situation
One of the crucial aspects of the “takeover fever” in the banking sector is merger control. In Austria, this cartel law issue became the focus of public attention when the merger between Bank Austria and CA was approved by the European Commission only after adequate legal arrangements had been made by the parties concerned. The merger control authority examines concentrations from a competition law perspective if a “specified dimension” is reached, with the criteria being the turnover of the undertakings concerned and of their affiliated undertakings. In the banking sector, turnover is not suited as a quantitative indicator of the economic power of an undertaking. For this reason, both the EU Merger Regulation and the Austrian Cartel Act contain special provisions for the calculation of the notification thresholds, which are based on the sum of certain income items as defined in the Bank Accounts Directive as a turnover proxy. The study represents an extensive discussion of this calculation method.
The opinions expressed in the section “Studies” are those of the individual authors and may differ from the views of the Oesterreichische Nationalbank.