Monetary Policy and the Economy Q2/09

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• Monetary Policy and the Economy Q2/09 (PDF, 2.2 MB) June 2009.

Studies and Analyses

• Economic Crisis Unleashes Deep Recession in Austria – Stabilization Expected at Year-End (PDF, 771 kB) Ragacs, Vondra. Ragacs, Vondra – Monetary Policy and the Economy Q2/09 According to the June 2009 economic outlook of the Oesterreichische Nationalbank (OeNB), the Austrian economy is projected to enter a deep recession in 2009 owing to the global slump in growth, with real GDP set to shrink by 4.2%. After further declining by a modest 0.4% in 2010, positive real annual GDP growth of 1.2% will reemerge only in 2011. Compared with the OeNB December 2008 economic outlook, growth expectations for 2009 and 2010 were downgraded by 3.9 and 1.2 percentage points respectively. This major revision reflects the steep slump in the demand for exports and investment – unparalleled in the post-war period. The current downturn is so pronounced that GDP levels seen in 2007 will not return until 2011. HICP inflation will ease from 3.2% in 2008 to a mere 0.4% in 2009 and rise modestly to 1.1% and 1.2% in 2010 and 2011 respectively. en economic outlook, austria C5, E17 Jun 30, 2009, 12:00:00 AM

• Inflation Expectations – Role and Measurement for Monetary Policy (PDF, 672 kB) Gnan, Scharler, Silgoner. Gnan, Scharler, Silgoner – Monetary Policy and the Economy Q2/09 Inflation expectations play a crucial role in modern monetary policy, given their capacity to influence actual inflation and given their informative value on the central bank’s credibility with regard to safeguarding price stability. The risk of a de-anchoring of inflation expectations in the wake of soaring energy and commodity prices figured among the key motivations for international hikes in official interest rates between 2007 and mid-2008. But also the recent abrupt decline in headline inflation – driven by the collapse in energy and commodity prices as well as the sharp global recession – may bear the risk of affecting inflation expectations, this time downward. An appropriate conceptualization and measurement – in real time – of inflation expectations is therefore essential for successful monetary policy. Building on the current state of economic theory and central bank practice, this study addresses four questions: First, which agents’ or sectors’ inflation expectations should be considered? Second, what time horizon of inflation expectations is relevant for monetary policy decisions? Third, what are the relative merits and drawbacks of the various available measures of inflation expectations in the light of the answers to the first two questions? Finally, how do shocks to inflation expectations affect actual inflation in the euro area? The study finds, first, that to gauge future risks for inflation and to assess central bank credibility comprehensively across various constituencies, it would be desirable to capture wage and price setters’ inflation expectations better than so far. Second, besides the much-quoted long-term inflation expectations, also medium-term inflation expectations (beyond one and below five years) should be given due consideration. Third, the available empirical measures of inflation expectations only partly fit these conceptual requirements. Given the important limitations of the proxy measures currently available in the euro area, we recommend further research and improving data coverage. Finally, the study confirms empirically that shocks to expected inflation account for a considerable part of actual inflation dynamics. The influence is stronger for financial market-based measures and for forecasters’ inflation expectations than for measures based on consumer expectations. This may also reflect the longer time-horizon of these indicators. Thus, expectation shocks may represent a serious risk for price stability. en inflation expectations, monetary policy, heterogeneity, VAR models E31, E58 Jun 30, 2009, 12:00:00 AM

• Responses of Austrian Firms to a Decline in Demand – Results of a Company Survey (PDF, 656 kB) Kwapil. Kwapil – Monetary Policy and the Economy Q2/09 Based on a survey of around 560 Austrian firms conducted within Wage Dynamics Network (WDN) of the ESCB this study investigates how these firms respond to a decline in demand. About 80% of the firms surveyed report that they consider cutting costs a relevant or highly relevant measure in response to a demand shock. The interpretation of the responses suggests that such cost cuts mitigate, at least in part, the drop in output and thus tend to dampen the shock. Furthermore, 55% of firms stated that they would primarily cut nonlabor costs, while 45% would rather cut labor costs; also, firms would rather dismiss employees than cut their base wages. This attitude of Austrian firms can be mainly traced to their fear of declines in labor productivity. en survey data, demand shock, wage rigidities C25, E31, J30 Jun 30, 2009, 12:00:00 AM

• The Role of Exchange Rate Movements for Prices in the Euro Area (PDF, 1.1 MB) Gaggl. Gaggl – Monetary Policy and the Economy Q2/09 This study provides new evidence on the degree of exchange rate pass-through (ERPT) within the euro area after the launch of the euro up to the end of 2007. ERPT to import, producer, and consumer prices is estimated within a simple vector auto regression (VAR) framework. ERPT in the euro area is found to be broadly consistent with earlier studies in that it exhibits the following properties: ERPT (a) is incomplete; (b) decreases along the distribution chain; (c) might have slightly decreased; and (d) varies significantly across individual EMU member countries. en foreign exchange, open economy macroeconomics F31, F40 Jun 30, 2009, 12:00:00 AM

• Housing Wealth of Austrian Households (PDF, 691 kB) Fessler, Mooslechner, Schürz, Wagner. Fessler, Mooslechner, Schürz, Wagner – Monetary Policy and the Economy Q2/09 Real estate holdings, i.e. housing wealth and estates in land account for the majority of assets owned by Austrian households. At the same time, the associated mortgage loans constitute the bulk of households’ liabilities. Therefore, detailed data on real estate holdings and real estate financing are highly relevant both from the monetary policy perspective and with regard to the objective of maintaining financial stability. This is why in September 2008 the Governing Council of the ECB decided to initiate a comprehensive project aimed at collecting comparable data on household assets and liabilities across the euro area. All Eurosystem central banks will take part in this project. Many other central banks, including those in the U.S.A., Italy, Spain and Cyprus, have a long tradition of collecting and analyzing such data. As a first contribution by the Oesterreichische Nationalbank (OeNB) to this Eurosystem project, this study provides the first microdata-based assessment of Austrian households’ real estate holdings. In the primary residence category, Austrian households’ average housing wealth is estimated at EUR 130,000 (or at EUR 110,000, excluding the top 1% of observations in the real estate wealth distribution of the primary residence), while their average total housing wealth is estimated to come to EUR 250,000 (or EUR 200,000, excluding the top 1% of observations in the total real estate wealth distribution). The total housing wealth of Austrian households is estimated at a minimum of EUR 690 billion. en households’ wealth, real assets, housing finance D14, D31, R21, R31 Jun 30, 2009, 12:00:00 AM

• Beyond the Crisis: Economic Policy in a New Macroeconomic Environment – Summary of the 37th Economics Conference (PDF, 635 kB) Gnan, Raunig. Gnan, Raunig – Monetary Policy and the Economy Q2/09 The 37th Economics Conference of the Oesterreichische Nationalbank (OeNB) on May 14 and 15, 2009, addressed the question as to whether the current situation – which may go down in economic history as the “Great Crisis” – may lead to lasting changes in the relationship between government and markets. The conference brought together distinguished representatives from the world of politics, business, central banks and science to discuss this topic. en Jun 30, 2009, 12:00:00 AM