Monetary Policy and the Economy Q2/04

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• Monetary Policy and the Economy Q2/04 (PDF, 729 kB) June 2004.

Studies and Analyses

• Global Recovery and Stable Domestic Economic Conditions Support (PDF, 208 kB) Fenz, Scharler, Schneider. Fenz, Scharler, Schneider - Monetary Policy and the Economy Q2/04 en Jun 30, 2004, 12:00:00 AM

• The Impact of Oil Price Changes on Growth and Inflation (PDF, 154 kB) Schneider. Schneider - Monetary Policy and the Economy Q2/04 This contribution looks into the impact of oil price changes on growth and inflation. Oil price shocks affect the economy through the supply side (higher production costs, reallocation of resources), the demand side (income effects, uncertainties) and the terms of trade. The effects of oil price shocks have become less intense over time (thanks to technological innovation, the development of cost-effective alternative sources of energy, sectoral change and the structural change of the oil market) and are asymmetric. An increase in the price of oil feeds through to GDP growth to a much larger extent than a decline, a phenomenon that can be attributed to adjustment costs associated with sectoral reallocations, the implications of uncertainties for spending on consumer durables and investment, and nominal wage rigidities. Furthermore, the element of surprise in oil price hikes seems to play a considerable role. Thus, when a rise in the price of oil occurs after a prolonged period of oil price stability, it has a larger impact than a price hike which immediately follows previous cuts. The role of monetary policy is still a controversial issue. According to some authors, a tightening of monetary policy following an oil price shock has a much more severe impact than the direct effects of the oil price shock themselves. However, empirical evidence on this matter is ambiguous. Current simulations for the euro area, the U.S.A. and Japan show that a constant oil price rise of 10% generates negative growth effects of some 0.1% a year in the first three years — not taking into account monetary responses. After that, the negative effects quickly fade. The impact on inflation ranges from 0.1 to 0.2 percentage point, with Austria at the lower end of the international spectrum. A simulation of the effects caused by the oil price remaining stable at USD 40 as of the third quarter of 2004 instead of falling to USD 29.2 until 2006 — as assumed in the OeNB Spring 2004 Outlook — would slow down growth in Austria by 0.03 percentage point in 2004 and by 0.2 percentage point in both 2005 and 2006. Inflation would be 0.1, 0.4 and 0.3 percentage point higher in 2004, 2005 and 2006, respectively. en Prices, inflation, growth, oil Jun 30, 2004, 12:00:00 AM

• Sectoral Specialization in Austria and in the EU-15 (PDF, 191 kB) Janger, Wagner. Janger, Wagner - Monetary Policy and the Economy Q2/04 This study examines sectoral specialization patterns in the EU-15 and in the euro area as well as in Austria. These patterns have policy relevance in so far as a high degree of sectoral specialization may trigger asymmetric shocks, foster the emergence of inflation differentials and impact on long-term growth. The developments seen since 1980 have created a favorable climate for conducting the single monetary policy; the degree of sectoral specialization is low in Austria and the EU, it has changed only moderately and has caused neither cyclical nor inflation differentials. At the same time, the individual sectors shares in value added have changed, in some cases even dramatically. However, there are signs both in the euro area and in Austria that the current sectoral specialization patterns provide suboptimal conditions for long-term growth. en Specialization, Austria, EU-15 Jun 30, 2004, 12:00:00 AM

• The Role of Revaluation and Adjustment Factors in Pay-As-You-Go Pension Systems (PDF, 200 kB) Knell. Knell - Monetary Policy and the Economy Q2/04 This study examines the role of revaluation and adjustment factors in pension systems. The first part sheds light on the determination of revaluation and adjustment factors according to the General Social Security Act (Allgemeines Sozialversicherungsgesetz — ASVG) and how these factors have evolved over time. The analysis shows that since the mid-1980s the revaluation factors have been set more or less in line with the inflation rate; in other words, contributions have not, in fact, been revalued in real terms. The author then demonstrates that such a system eventually conflicts with principles of intragenerational and intergenerational fairness. In such case, the mere extension of the assessment period may entail substantial reductions in pension benefits. When we consider the Austrian situation, extending the assessment period from 15 to 40 years may cause the average pension to drop by 11% to 36% (depending on the underlying assumptions). Capping maximum losses at 10% certainly is a solution for persons aged 35+ at the cutoff date, but anyone younger than that would have to bear the brunt of such a pension reform measure. In the light of the problematic fairness aspects of the current revaluation regime, relating the necessary reform of the Austrian pension system and the concomitant paring of benefits too closely to the effects of this revaluation regime does not seem to be the right approach. In a new (harmonized) system, the revaluation factors should at any rate be linked to wage growth. The last section of this paper focuses on issues which are crucial in wage-based revaluation regimes and which are mainly related to the emergence of demographic shifts. Some of the questions tackled are: Should revaluation be based on the growth rate of average earnings or of the total wage bill? Is the 80-45-65 formula frequently cited in the pension reform debate in Austria consistent in itself? Should automatic adjustment factors (sustainability factors) be built into the pension system, and if so, which ones? Does it make any difference then whether we are dealing with a traditional pay-as-you-go pension model or a notional account system? en Pension Systems Jun 30, 2004, 12:00:00 AM

• Financial Market Structure and Economic Growth: A Cross-Country Perspective (PDF, 182 kB) Fritzer. Fritzer - Monetary Policy and the Economy Q2/04 The paper contributes to understanding the impact of financial system indicators on economic growth. A particular emphasis is placed on financial structure indicators, which measure the specific organization of the financial system, namely, banking sector concentration, foreign bank penetration, government regulation and the efficiency of the banking industry - as opposed to depth indicators, which measure financial market liquidity. In this respect (1) the concentration of banks was found to have a detrimental impact on growth. However, concentration may also have indirect and positive impacts on growth depending on a countries initial stage of economic development, i.e. for comparatively more developed countries, the negative impact of concentration on long-run growth is lower. (2) Financial liquidity indicators, which work through both physical capital accumulation and total factor productivity, have a strong impact on economic growth. The catalyst role capita, finally, determines the growth path of an economy. Low initial real GDP is positively related to the growth path of economies in terms of the "latecomer advantage". Given the detrimental effects of banking sector concentration on economic growth, a tentative policy conclusion would be that antitrust authorities should strive to maintain competitively structured markets. In order to increase competition in an environment subject to mergers, which significantly reduce the number of financial services providers, obstacles to the mobility of customers should be removed, for example by setting and enforcing transparency rules regarding products and prices for financial services. en Financial Markets, growth Jun 30, 2004, 12:00:00 AM

• The Role of Bank Lending in Market-Based and Bank-Based Financial Systems (PDF, 151 kB) Kaufmann, Valderrama. Kaufmann, Valderrama - Monetary Policy and the Economy Q2/04 Theoretical models of the role of credit in business cycles and of the transmission mechanism have largely concluded that, given capital market imperfections, credit conditions may amplify and propagate the effect of shocks in the economy. This paper compares the behavior of loans to households and loans to nonfinancial corporations in Austria, Germany, the Netherlands and the United Kingdom. Analyzing credit aggregates in these countries in a framework accounting for diverging economic environments allows for an assessment of how the amplifying and asymmetric effects of credit aggregates differ between market-based and bank-based financial systems. The results show that the state of the economy impacts the way in which shocks are propagated through credit markets. The effects of shocks are smoothed over time in bank-based financial systems irrespective of the economic environment and in market-based systems only during periods of subdued economic growth or tight liquidity conditions. During economic recoveries we observe an amplifying effect in market-based systems. Thus, the deceleration in credit growth in the above-mentioned countries between 1999 and 2003 was mainly demandside rather than supply-side driven, given the overall slowdown of the economy. en Bank Lending Jun 30, 2004, 12:00:00 AM

• Growth and Stability in the EU (PDF, 99 kB) Kaufmann, Raunig, Schuberth. Kaufmann, Raunig, Schuberth - Monetary Policy and the Economy Q2/04 en Conferences Jun 30, 2004, 12:00:00 AM