Editorial
Reports
Banking Holidays in Austria in the Year 2002
Calendar of Monetary and Economic Highlights
Economic Outlook for Austria from 2001 to 2003 (Fall 2001)
Economic Background
Money and Credit in the First Half of 2001
Balance of Payments in the First Quarter of 2001
Austria’s International Investment Position in 2000
Austrian Outward and Inward Direct Investment − Results of the 1999 Survey and Development of Selected Indicators
Studies “Aspects of the Transmission of Monetary Policy”
The Transmission Mechanism and the Role of Asset Prices in Monetary Policy
This paper surveys the transmission mechanisms of monetary policy beyond the standard interest rate channel by focusing on how monetary policy affects the economy through other asset prices. The study outlines how the monetary transmission mechanisms operating through stock prices, real estate prices and exchange rates affect investment and consumption decisions of both firms and households. Given the role that asset prices play in the transmission mechanism, central banks have been often tempted to use them as targets of monetary policy. This paper shows that despite the significance of asset prices in the conduct of monetary policy, targeting asset prices by central banks is likely to lead to worse economic outcomes and might even erode the support for their independence.
Asymmetric Transmission of Monetary Policy through Bank Lending − Evidence from Austrian Bank Balance Sheet Data
The investigation allows the asymmetry in the reaction of bank lending to interest rate changes to have two dimensions: a cross-sectional and a time dimension. Crosssectional asymmetry arises if the ability of substituting external liquidity due to decreases in deposits differs between banks. The asymmetry over time relates to the economic stance, whereby in periods of subdued growth liquidity constraints are exacerbated. Here, the group and the time indicators are both part of the model estimation. The results show that the bank lending reaction differs significantly between economic regimes. Most of the banks fall into one group, while a few form the remaining groups. The classification is characterized by the extent of, and the timely reaction of bank lending to, interest rate changes. However, the classifications cannot be characterized by means of bank features (like size and liquidity strength) typically thought to determine the bank lending channel.
Balance Sheet and Bank Lending Channels: Some Evidence from Austrian Firms
Because internal and external funds are not perfect substitutes, monetary policy may have real and distributional effects on investment through the credit channel. This paper investigates the balance sheet channel and the bank lending channel in Austria. To estimate the effect of monetary policy, financial variables are included in an investment demand equation as well as a firm-specific user cost of capital. The estimations show that financial variables are significant determinants of investment demand, which confirms the existence of a balance sheet channel in Austria. To test for the bank lending channel, firms are arranged into groups depending on their degree of bank lending dependency. It is shown here that small and young firms tend to react more strongly to a monetary shock, but the definition of “small” and “young” makes a difference for the size of the effect. As expected, the possibility of replacing short-term debt with trade credit and the existence of a main bank seem to dampen the effect of monetary policy.
Financial Innovation and the Monetary Transmission Mechanism
The interface between the monetary authority and the real economy is situated in the financial markets. Thus, any phenomenon that affects the structure and condition of the financial markets has the potential to affect the transmission mechanism. Over the last two decades, financial markets in most industrial economies have been transformed by various waves of financial innovation. This paper lays out an analytical framework, based on recent research, to examine the transmission mechanism, and asks how each of several forms of financial innovation has affected the elements of the framework in recent decades. The paper argues that financial innovation, particularly since 1980, has brought with it the potential to affect nearly every aspect of the monetary transmission mechanism. Moreover, empirical evidence in the cases of deregulation and securitization suggests that the potential has in fact been realized, and that monetary policy in industrial economies is weaker as a result.
Transmission Mechanism and the Labor Market: A Cross-Country Analysis
In this article we investigate the role of labor market institutions for the transmission of monetary policy. Empirical results drawn from a cross-country analysis including a sample of 19 countries indicate that higher replacement rates, a higher tax wedge and a higher degree of union density tend to increase the impact of monetary policy on cyclical unemployment, whereas more active labor market policy and a higher degree of coordination between employers and employees dampen the effect. On the other hand, no significant effect on monetary transmission could be found for the duration of unemployment benefits, the degree of labor standards and union contract coverage.
Monetary Transmission and Fiscal Policy
The process of monetary transmission is subject to on-going transformation, which can result not only from changes to both economic structures and behavior patterns, but also from new institutional conditions. This study examines the extent to which a specific institutional change such as the implementation of the Stability and Growth Pact in the context of the Economic and Monetary Union, influences the monetary transmission process. Some simple simulation experiments for Austria show that the inclusion of fiscal rules (from the Stability and Growth Pact) visibly enhances the impact of a monetary shock.
Principles for Building Models of the Monetary Policy Transmission Mechanism
Mathematical models of the monetary policy transmission mechanism are useful instruments of analysis for both policy decision makers and advisers. Given the lack of understanding of how the transmission mechanism works, constructing a mathematical model that gives a complete view of the transmission mechanism is a major challenge for policy modelers. Thus, models of the monetary policy transmission mechanism that are built to provide monetary policy advice should have certain characteristics to maximize their usefulness to monetary policymakers. This paper proposes ten principles for model builders that, if respected, will render advice from their models more useful for monetary policymakers.
The opinions expressed in the section “Studies” are those of the individual authors and may differ from the views of the Oesterreichische Nationalbank.