Monetary Policy and the Economy Q3/08

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• Monetary Policy and the Economy Q3/08 (PDF, 2.8 MB) September 2008.

Studies and Analyses

• Global Economic Downturn Persists (PDF, 277 kB) Fenz, Haar-Stöhr, Silgoner. Fenz, Haar-Stöhr, Silgoner – Monetary Policy and the Economy Q3/08 The global economic downturn is persisting. In the U.S.A., tax rebates provided only a temporary stimulus to the economy. As the U.S. real estate crisis continues, it triggered the takeover of mortgage finance corporations Fannie Mae and Freddie Mac by their regulator in early September 2008. The crisis of the U.S. real estate and financial sectors, which has gathered momentum lately, sustained high commodity prices and the deterioration in the labor market are all badly damaging consumer confidence. As a reaction to the most recent aggravation of the financial crisis, the U.S. government announced its plan to establish a well-endowed stabilization fund. As to the euro area, economic growth slowed unexpectedly sharply in the second quarter of 2008. Real GDP contracted by 0.2% quarter on quarter. Particularly, gross fixed capital formation made a negative contribution to growth, but also consumer restraint depressed economic performance. The ECB’s current projections assume only a gradual improvement in the economy. en global outlook, euro area, central and (south-)eastern Europe, Austria E2, E3, O1 Sep 30, 2008, 12:00:00 AM

• Tax and Economic Growth in Austria (PDF, 334 kB) Pesendorfer. Pesendorfer – Monetary Policy and the Economy Q3/08 Taxation influences the behavior of economic agents and, as a consequence, a country’s economic activity and growth. The nature and size of this impact depends on the object or activity taxed as well as on the tax rate and the design of the tax. In a recent survey of 21 countries, the OECD sets up a ranking of tax categories based on their effects on wealth and GDP growth. This study investigates to what extent this ranking reflects the taxation-growth relationship in Austria. To this end, we compare the Austrian tax structure against the tax structure in the countries posting the highest GDP per capita levels and growth rates. Moreover, we assess the individual tax categories’ impact on the key explanatory variables of economic growth. The investigation is based on the central assumption that tax revenues are kept constant and that reducing the revenues from one tax category requires increasing those from another tax source. The analysis shows that the high level of labor taxes, including social security contributions, negatively affects the growth potential in Austria. The relative share of revenues from property taxes, which, according to the OECD survey, hamper economic growth least, is lower in Austria than in almost all other OECD countries. Although the share of revenues from consumption taxes in Austria is comparable to that in the countries posting the best GDP per capita figures, tax rates are necessarily higher because the Austrian VAT system grants numerous exemptions and has a set of reduced rates. The substantial reduction of the tax burden on businesses brought about by the 2004/2005 tax reform improved the conditions for economic growth. The low degree of progressivity of taxes on labor income fosters productivity and economic efficiency rather than the redistribution of income. en taxation, economic growth, Austria H20, E62, O43 2008?string-10

• Economic Country Risks Emanating from Austria’s International Exposure (PDF, 591 kB) Fuchs. Fuchs – Monetary Policy and the Economy Q3/08 Austria’s special role as one of the leading investors in Eastern and Southeastern European growth markets increasingly raises questions on the risk capacity of Austria’s foreign portfolio. Using selected macroeconomic indicators, this article assesses the economic country risk attached to Austria’s external assets. A scoring model facilitates the calculation of individual country risks, which are linked to detailed regional data from the external statistics of the Oesterreichische Nationalbank (OeNB), thus enabling us to draw conclusions on the regional and functional risk structure of Austrian international investment. This reveals that, in capitalweighted terms, the developed and leading financial markets of Europe and the U.S.A. have a far stronger influence on total risk than that of the 12 EU entrants since 2004 (EU-12) or the Eastern and Southeastern European countries. Despite its intensive investment in Eastern Europe, Austria’s international risk largely stems from securities holdings in developed industrialized countries. The EU-12 account for no more than a fifth of capital-weighted risk, while the region of Eastern and Southeastern Europe represents just a tenth of total exposure. Nevertheless, some growth markets, such as Hungary, Poland, the Czech Republic or Russia, already have more impact on Austria’s total risk than some Western European markets. The projection up to 2009 suggests a leveling off in the total risk presented by Austria’s external assets. A generally stable development in the EU-27 is somewhat offset by a more unfavorable risk environment in some European growth markets and in the U.S.A. en country risk, financial integration, portfolio choice, international investment position F36, G11, G15, G32 Sep 30, 2008, 12:00:00 AM

• Four Monetary Policy Strategies in Comparison: How to Deal with Financial Instability? (PDF, 859 kB) Cuaresma, Gnan. Cuaresma, Gnan – Monetary Policy and the Economy Q3/08 The article provides a review of the monetary policy strategies of four major central banks – the Eurosystem, the Federal Reserve, the Bank of Japan and the Bank of England – and investigates whether these strategies are modified in times of financial instability. The study finds a number of – statutory and actual – differences regarding the central banks’ objective(s), strategies and approaches to achieve the objective(s), and communication, including the publication of forecasts. While central bank laws are often not very explicit about financial stability, there is consensus that the latter is a major concern in practice. Many see the 2007/2008 financial crisis as yet another reminder that central banks in their monetary policy strategies need to take a longer-term and broader view than might have been suggested only a few years ago. All four central banks’ monetary policy strategies in principle allow for adequate incorporation of financial stability concerns. The lender of last resort function poses challenges for the operational implementation of monetary policy and their credibility as competent and reliable policy institutions. While central banks have been praised for their flexibility in dealing with the recent crisis, this very flexibility may also create moral hazard for the future. Empirical estimates of Taylor-type reaction functions, augmented for a measure of financial instability, confirm some relevant differences in the reaction elasticities to inflation and the output gap, as well as significant effects of financial instability on the interest rate setting behavior of the Bank of England, which are in line with the theoretical view that less inertia in monetary policy should be allowed for in times of financial market risks. en central bank, monetary policy, financial stability, monetary policy strategy, Taylor rule E52, E58, E63, G18 Sep 30, 2008, 12:00:00 AM

• The Economics of Financial Stability: Research Workshop at the OeNB (PDF, 253 kB) Summer. Summer – Monetary Policy and the Economy Q3/08 On July 7–8, 2008, an international group of researchers met at the Oesterreichische Nationalbank (OeNB) in Vienna to present and discuss current research on Financial Stability. Hyun Song Shin from Princeton University and Martin Summer from the OeNB’s Economic Studies Division, who jointly organized this research workshop, titled the program “The Economics of Financial Stability”. en Sep 30, 2008, 12:00:00 AM

• Global Market Disruptions – Will Global Imbalances Unwind? (PDF, 291 kB) Backé, Nauschnigg. Backé, Nauschnigg – Monetary Policy and the Economy Q3/08 From June 12 to 14, 2008, the Oesterreichische Nationalbank (OeNB) hosted a roundtable discussion on global imbalances at Weißenbach/Attersee co-organized by the European Affairs and International Financial Organizations Division of the OeNB and the Reinventing Bretton Woods Committee (RBWC). The participants, consisting above all of public sector representatives (especially central bankers), market participants and academics, engaged in a lively discussion and a fruitful exchange of information. en global imbalances, capital flows, role of the U.S. dollar, sovereign wealth funds, Bretton Woods F02, F15, F34, F42 Sep 30, 2008, 12:00:00 AM