Monetary Policy and the Economy Q2/08

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• Monetary Policy and the Economy Q2/08 (PDF, 1.2 MB) June 2008.

Studies and Analyses

• Financial Crisis and Spike in Commodity Prices Dampen Growth and Fuel Inflation (PDF, 291 kB) Fenz, Schneider. Fenz, Schneider – Monetary Policy and the Economy Q2/08 According to the June 2008 economic outlook of the Oesterreichische Nationalbank (OeNB), economic growth in Austria is projected to weaken compared with the economic boom years of 2006 and 2007 owing to the international financial crisis and the spike in commodity prices. Real GDP growth is projected to come to 2.2% in 2008 and then dip to a low of 1.7% in 2009 before climbing back to 2.4% in 2010. Compared with the OeNB December 2007 economic outlook, growth expectations for 2008 and 2009 were downgraded by 0.3 and 0.6 percentage points respectively. At 3.1%, inflation in 2008 is at a record high since 1993 but is projected to fall to 2.4% in 2009 and to 1.9% in 2010. Employment growth remains robust, with a further drop in unemployment to 4.2% anticipated for 2008. en forecast, Austria C5, E17 Jun 30, 2008, 12:00:00 AM

• Supply-Side Triggers for Inflation in Austria (PDF, 357 kB) Janger. Janger – Monetary Policy and the Economy Q2/08 The supply-side analysis of sectors that have determined price developments in Austria since fall 2007 strongly suggests a lack of competition in the following industries in the medium term: processing and wholesaling of dairy products, pasta production, electricity and gas supply, cement production, and pharmaceutical retailing. Signs of weak competition are less clear but apparent in the following industries: production of fats and oils, clothes retailing, production and wholesaling of pharmaceuticals, car parts trade, sewage disposal and garbage collection. There are few or no indications of a lack of competition in: baked goods production, grain wholesaling, food retailing, home centers, production and wholesaling of construction materials, gas stations and footwear retailing. In food retailing, legitimate business strategies may have contributed to price developments. Moreover, price increases may to some extent have been caused by data limitations (use of shelf inventory data rather than scanner data) and by second-round effects on the part of firms, which find it easier to raise prices in an environment of generally rising prices. Additional in-depth analyses are necessary for a wide range of industries. Economic policymakers may intensify competition in pharmaceutical retailing (by enforcing prescriptions of generic rather than brand-name drugs) and the garbage collection industry (by changing the fee system). Restricting the concentration of regional or local sales units and establishing an integrated European energy market would unlock a (limited) potential for reducing inflation in foods and energy. Policymakers should envisage implementing changes above all in the service sector, which determines inflationary trends in Austria in the medium term. Measures needed to enhance competition include improving data sources, monitoring competition based on economic data, strengthening the competition authority, reforming regulations to ease market entry and to strengthen competition, and increasing price transparency. en competition, inflation E31, L11 Jun 30, 2008, 12:00:00 AM

• Do Aggregate Demand Factors Influence Current Inflation Developments? (PDF, 301 kB) Rumler, Valderrama. Rumler, Teresa, Valderrama – Monetary Policy and the Economy Q2/08 The relationship between inflation developments and aggregate demand is usually modeled with a Phillips curve. This study estimates the Phillips curve for Austria and, for the sake of comparison, for the euro area as well as for four euro area member countries. In order to test the robustness of our results, we estimate both the traditional and the New Keynesian Phillips Curve (NKPC) for the period from 1970 to 2007. We also investigate whether the relationship between economic activity and inflation has changed over time. The results show that there was indeed a significant relationship between inflation and the output gap in most countries; but its coefficient diminished over the years, and became insignificant in almost all countries toward the end of the estimation period. Exceptions are Austria and the Netherlands: For these countries the estimates are not significant, and for Austria we get contradictory results. We can conclude from this and from the observation that the output gap in the countries under review is now slightly negative, or at best closed, that the current rise in inflation is not the result of an overheating economy. en demand-driven inflation, traditional Phillips curve, New Keynesian Phillips Curve E31 Jun 30, 2008, 12:00:00 AM

• Stock Holdings in Austria (PDF, 199 kB) Fessler, Schürz. Fessler, Schürz – Monetary Policy and the Economy Q2/08 Based on micro data, this study reviews the stock holdings of Austrian households. Stock investment is not widely spread in Austria, and those stock holdings that do exist are concentrated among wealthy, high-income households. This finding from the OeNB’s Survey on Financial Household Wealth (SFHW) ties in with available international data. en portfolio choice, wealth, incomplete portfolios, diversification D31, E2, G11, H31 Jun 30, 2008, 12:00:00 AM

• The Impact of EU Enlargement in 2004 and 2007 on FDI and Migration Flows Gravity Analysis of Factor Mobility (PDF, 264 kB) Breitenfellner, Cuaresma, Mooslechner, Ritzberger-Grünwald. Breitenfellner, Cuaresma, Mooslechner, Ritzberger-Grünwald – Monetary Policy and the Economy Q2/08 This paper contributes to the ex post assessment of macroeconomic effects triggered by the 2004 and 2007 wave of EU enlargement, with a specific focus on factor trade, i.e. the crossborder mobility of labor and capital. While most of the potential for trade in goods and for foreign direct investment (FDI) was tapped ahead of actual enlargement, above all migration effects are spread out over a longer period, given transition arrangements for labor market integration. We use (innovative) gravity models to establish the potential for factor trade and crosscheck the results against recent developments. Our key finding is the uneven development of capital and labor mobility since EU enlargement. While migration potentials are materializing as expected, FDI stocks have remained relatively stable at already high levels. Furthermore, we observe a nonlinear relationship between migration and per capita income that may be explained on theoretical grounds and attributed to institutional factors. While the highest-income countries (above all Slovenia and the Czech Republic) are already turning into immigration countries, the low-income countries and those last to join the EU (Bulgaria and Romania) are likely to see further emigration and more FDI inflows. en EU enlargement, factor trade, labor mobility, capital mobility, migration, foreign direct investment, gravity model C33, F15, O11 Jun 30, 2008, 12:00:00 AM

• Toward the First Decade of Economic and Monetary Union – Summary of the 36th Economics Conference (PDF, 145 kB) Gnan, Summer. Gnan, Summer – Monetary Policy and the Economy Q2/08 The 36th Economics Conference hosted by the Oesterreichische Nationalbank (OeNB) on April 28 and 29, 2008, was dedicated to looking back on the first ten years of the euro and ahead to future challenges for Economic and Monetary Union (EMU). With contributions invited from both economic policymakers and academics, the conference was designed to foster an objective and informed debate on this significant chapter in recent economic history. The OeNB succeeded in bringing together high-ranking representatives of central banks, international and national policymakers as well as representatives of the business community and of academia. en Jun 30, 2008, 12:00:00 AM