Monetary Policy and the Economy Q1/06

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• Monetary Policy and the Economy Q1/06 (PDF, 1016 kB) March 2006.

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• Economic Outlook Improves in Euro Area – Inflation Pressure Persists Due to High Energy Prices (PDF, 209 kB) Breitenfellner, Fenz, Reininger. Breitenfellner, Fenz, Reininger – Monetary Policy and the Economy Q1/06 The world economy is chugging along, but its key engines may be changing. While the economies of the U.S.A. and China have reached more mature levels, economic activity is now gradually gaining momentum in Europe and Japan. In Austria, economic growth over the year 2005 clearly regained momentum after a substantial but temporary slowdown in late 2004 and early 2005.Whereas previously economic growth was mainly driven by exports, it is now increasingly supported by domestic demand, too. Already in the second half of 2005, Austrian businesses visibly stepped up their investment activities, while recovery in consumer spending has been more hesitant. According to the OeNB's economic indicator, growth in Austria's real GDP (seasonally adjusted, compared to the previous quarter) will jump to 0.8% in both the first and second quarters of 2006. Despite high energy prices, inflation has abated considerably, thus supporting the real purchasing power of households. Finally, employment has risen, but the rate of unemployment remains elevated nonetheless. en economic developments, global outlook, euro area, central and (south-)eastern Europe, Austria E200, E300, O100 Mar 31, 2006, 12:00:00 AM

• The Potential Growth Prospects of the Austrian Economy — Methods and Determinants (PDF, 248 kB) Janger, Scharler, Stiglbauer. Janger, Scharler, Stiglbauer – Monetary Policy and the Economy Q1/06 In this paper we discuss issues related to the longer-run growth prospects of the Austrian economy. We briefly survey methods commonly applied to estimate the growth potential of an economy. According to currently available estimates, the growth rate of Austrian potential output is roughly 2%.We observe that potential growth has slowed down slightly over the past two decades. Turning to prospects for total factor productivity growth, there have been significant improvements over the last ten years with respect to R&D and trade openness. The impact of dynamic agglomeration gains also depends on the transport infrastructure. Product market competition and entry have markedly improved. Austria still has deficits in the areas of higher education and venture capital. By and large, most indicators — at least their growth rates — point towards good prospects for total factor productivity (TFP) growth. As regards labor supply, we show that demographic projections point to a slowdown in the growth of the working-age population, which in turn may lead to declining growth rates of actual and potential output. Such results are often achieved by using growth equations. This approach probably overestimates the negative effect on total GDP growth. The slowdown of labor supply growth can be mitigated by increasing participation rates. Austria has undertaken significant steps to increase the labor market participation of older workers by a series of pension reforms. After a decline in 2002 labor force growth has been rising steadily since 2003. Moreover, female labor supply has been increasing considerably more strongly than male labor supply. en potential growth, TFP, labor market. E0, J0 Mar 31, 2006, 12:00:00 AM

• Oil Price Shock, Energy Prices and Inflation – A Comparison of Austria and the EU (PDF, 250 kB) Arpa, Cuaresma, Gnan, Silgoner. Arpa, Cuaresma, Gnan, Silgoner – Monetary Policy and the Economy Q1/06 The marked increase in the price of crude oil has also affected the prices of motor fuels, heating oil and other forms of energy. The extent and speed of these price reactions have varied widely in EU countries, and the accompanying inflationary effects have differed accordingly. For monetary and economic policy, it is important to know the channels through which oil price fluctuations are transmitted in order to assess their effects on inflation, economic growth and employment. This study presents a current overview of oil and primary energy markets worldwide and estimates the elasticities and the speed of adjustment parameters of motor fuel and heating oil prices in response to oil price fluctuations in the EU-25. In addition, we test whether prices react asymmetrically to increases and decreases in crude oil prices and examine their transmission to other forms of energy, such as natural gas, electricity, solid fuels and district heating. We highlight the effect of volume-based excise taxes, which have a strong differentiating as well as dampening effect on prices, and address the issue of whether fiscal policy should cushion the impact of price increases, for example by lowering energy taxes or by providing energy subsidies. Then we quantify the direct inflationary effects of an oil price shock in Austria in a simple simulation using the OeNB's inflation forecasting model. Finally, we derive conclusions for monetary and economic policy. en energy prices, energy markets, inflation, monetary policy. E31, E52, E62, Q43 Mar 31, 2006, 12:00:00 AM

• Reform of the Stability and Growth Pact (PDF, 252 kB) Diebalek, Köhler-Töglhofer, Prammer. Diebalek, Köhler-Töglhofer, Prammer – Monetary Policy and the Economy Q1/06 The objective of the Stability and Growth Pact is to secure sound fiscal policies, which have remained a national responsibility in Economic and Monetary Union. Ever since it first took effect, the Stability and Growth Pact had been subject to a reform debate, ultimately leading to its redesign in 2005. The debate intensified in 2002, when several European countries suffered from growing budgetary problems, and culminated in November 2003, when the Ecofin Council decided not to act upon European Commission recommendations to move to the next steps of the excessive deficit procedure for France and Germany and instead adopted conclusions putting the procedures in abeyance subject to certain undertakings by the countries concerned. Consequently, the Commission brought an action before the European Court of Justice. The conflict surrounding the correct procedure in line with the provisions of the Treaty establishing the European Community (the Treaty) and the Stability and Growth Pact, i.e. the correct interpretation and implementation of the procedural and factual steps laid down therein, brought to light differences of opinion between the EU Member States and the European Commission as well as among the Member States themselves. Against this background, the European Commission presented concrete proposals to reform the Stability and Growth Pact in the fall of 2004. At an extraordinary Ecofin meeting on March 20, 2005, the EU finance ministers reached a compromise on the reform of the Stability and Growth Pact. The reform includes measures applicable to both the preventive and the corrective arms of the Stability and Growth Pact. The top priority of the reform was to enhance Member States' national ownership of the fiscal framework and hence to safeguard the sustainability of public finances in the Economic and Monetary Union in the long run. Experience to date does not allow for a final assessment, but from the vantage point of monetary policy, certain weaknesses remain that had already been pointed out during the reform debate. en fiscal policy, fiscal rules, stability and growth pact reform, european monetary union. E61, H3, H6 Mar 31, 2006, 12:00:00 AM

• High Employment with Low Productivity? The Service Sector as a Determinant of Economic Development (PDF, 237 kB) Breitenfellner, Hildebrandt. Breitenfellner, Hildebrandt – Monetary Policy and the Economy Q1/06 Whether measured in terms of employment or value added, the service sector by far dominates the economies of industrialized countries. The positive connection between tertiarization and per capita income is confirmed in both country cross-section and time series analyses. This development can be explained by demand factors (e.g. the growing proportion of female employees) and supply factors (e.g. cost disease in the service sector). This paper analyzes data on 23 service activities, grouped into four subsectors (distribution, business, social and personal services). The analysis of each subsector's contribution to the development of employment and productivity between 1983 and 2003 illuminates the prevailing productivity gap between the EU-15 and the U.S.A. The corresponding investigation of four new EU Member States during their transformation processes points to an employment potential in the tertiary sector that has not yet been fully utilized. The study further identifies four tertiarization models (dynamic, lagging, managed and catching-up) that can be associated with different geographic regions. The process of tertiarization is compatible with growth in both employment and productivity. Different combinations of production- and consumption-oriented services can have a positive effect on growth. The concluding section discusses the role of the European Union's Lisbon strategy in enhancing the productivity of the service sector. en sectoral change, productivity, country comparison in the EU. O14, O52, O57, F15, L80, P20 Mar 31, 2006, 12:00:00 AM

• The Financial System and the Institutional Environment as Determinants of Economic Performance: Austria in Comparison (PDF, 217 kB) Fritzer. Fritzer – Monetary Policy and the Economy Q1/06 Empirical studies suggest that the Austrian economy would benefit considerably from a further integration of financial systems (Guiso et al., 2004). Against this background, this paper highlights selected aspects of the Austrian economy's financial structure and institutional environment in a cross-country comparison and evaluates the extent to which these factors are conducive to economic performance. Compared with the U.S.A. or the United Kingdom, the ownership structure of listed companies is highly concentrated in Austria and in many other euro area countries. In fact, the Austrian stock market stands out in terms of its high ownership concentration. However, empirical evidence indicates that an all too high level of ownership concentration has a negative impact on firm performance (see, for example, Gugler, 1999). Fostering investor protection is a natural lever to promote a higher degree of dispersion and hence a lower level of concentration. Although the standards of investor protection in Austria have improved substantially in recent years, they still need to be safeguarded and strengthened where necessary. Another important issue in this context is the development of venture capital markets which are key to innovation and hence to productivity. It is no coincidence that the most liquid venture capital markets are found in countries with the most developed stock exchanges — e.g. the U.S.A., the United Kingdom and the Netherlands. The Austrian venture capital market is one of the smallest by international standards. In order to promote venture capital in Austria, the local stock market, which provides exit opportunities for venture capitalists, needs to be deepened. According to several indicators (which were originally developed by Barth et al. (2004) — supervisory power, supervisory independence and private monitoring — and updated for the present purpose), the Austrian regulatory and supervisory framework seems to be fairly well designed to foster efficiency and stability in the banking sector: (1) Austria seems to be among those countries which grant a fairly high degree of power to the supervisory authority. (2) The supervisory power is complemented by adequate mechanisms to foster the reporting of reliable, comprehensive and timely information (private monitoring). (3) In comparison with other countries, the Austrian supervisory authority is quite independent from political interference and influences from the banking industry (supervisory independence). en financial systems, corporate governance, banking sector regulation. G28, K22, O4 Mar 31, 2006, 12:00:00 AM

• Price Setting and Inflation Persistence in Austria (PDF, 80 kB) Kwapil, Rumler. Kwapil, Rumler – Monetary Policy and the Economy Q1/06 On December 15, 2005, the Oesterreichische Nationalbank (OeNB) held a workshop on “Price Setting and Inflation Persistence in Austria.” The aim of this workshop was to discuss the OeNB's recent research results in the field of price dynamics and inflation1 with policymakers and the scientific community. The papers presented at the workshop analyzed the price formation process and the determinants of inflation persistence in Austria from different perspectives and on the basis of various data sources. The first session addressed the degree and determinants of price rigidities at the micro level. Session 2 provided an analysis of inflation persistence in Austria at the aggregate and sector levels, while session 3 dealt with Austrian consumers' inflation perceptions. A policy panel discussion concluded the workshop. en price rigidity, price setting, price perception. D40, E31 Mar 31, 2006, 12:00:00 AM