Monetary Policy and the Economy Q3/09

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• Monetary Policy and the Economy Q3/09 (PDF, 1.7 MB) September 2009.

Studies and Analyses

• Edging Out of Recession (PDF, 601 kB) Fenz, Pointner, Schreiner. Fenz, Pointner, Schreiner – Monetary Policy and the Economy Q1/04 The global slowdown appears to have come to an end during the summer of 2009. Most countries saw a smaller decline in economic activity in the second quarter, with some economies even recording positive growth rates once again. In the U.S.A., the economic contraction moderated in the second quarter of 2009, with the government’s economic stimulus packages and net exports making positive contributions to GDP growth, and the negative contribution from investment decreasing significantly vis-à-vis the previous quarter. With the household saving rate rising sharply, private consumption is making a negative contribution to growth. Although this development may help to reduce global imbalances, it could dampen the recovery in the U.S.A. In the euro area, too, there are signs of a gradual improvement, with GDP declining by a mere 0.1% quarter on quarter in the second quarter of 2009. This growth was underpinned not only by a strong positive contribution from net exports, but also consumption. The likelihood of a further increase in consumption, however, is uncertain, as the labor market situation is set to deteriorate and because consumer demand has recently been bolstered by fiscal stimulus packages that were only temporary. Investment remained weak, as capacity utilization was extremely low. Current forecasts predict a gradual recovery in the euro area economy. In the summer of 2009, euro area inflation bottomed out, with the HICP falling by 0.7% in July. This was due primarily to base effects stemming from commodity prices. The latest forecasts predict that there will be no risks to price stability until the end of 2010. The Central, Eastern and Southeastern European countries also recorded considerable declines in GDP growth in the first half of 2009. However, the stabilization of the financial markets, as well as leading indicators, suggest that there will be an improvement over the rest of the year. In many countries, the recession brought about reductions in current account deficits. After posting negative growth rates for four consecutive quarters, the Austrian economy is set to pick up again in the second half of 2009, mainly on the back of improved external conditions, fiscal stimulus packages and inventory cycle developments. The OeNB’s latest short-term indicator results show real GDP growth at 0.4% in both the third and fourth quarters of 2009 (seasonally and working day-adjusted, on a quarterly basis). Owing to the sharp slump recorded at the beginning of the year, a 3.6% contraction is forecast for the full year 2009. en global outlook, euro area, central and (south-)eastern Europe, Austria E2, E3, O1 Sep 30, 2009, 12:00:00 AM

• Will the Great Recession Lead to a Lasting Impact on Potential Output in Austria? (PDF, 729 kB) Gaggl, Janger. Gaggl, Janger – Monetary Policy and the Economy Q3/09 Based on the European Commission’s (2009) projections for potential output, we calculate a permanent potential output loss of between 4% and 6% until 2013, while we expect that the growth rate will eventually return to its precrisis level of close to 2% in the medium run before the effects of population aging set in. We do not expect high growth rates of actual GDP during the recovery. In a more pessimistic view, the effects of the crisis may seamlessly link with the effects of population aging on potential output, implying a decrease in trend potential output growth to about 1.5% by 2030. In an optimistic scenario, by 2011 most of the structural effects of the crisis will have disappeared and productivity growth will accelerate by 2020 to compensate for declining labor input, stabilizing the path of potential output. While uncertainty is high, it is likely that anti-climate-change policies, energy scarcity and an increase in both competition and demand from emerging markets will provide powerful incentives to innovate and invest. Adequate economic policies will be required in order to respond positively to these incentives. The crucial role of policies in raising medium-term output after severe recessions is also demonstrated by countries such as Finland, Sweden and Japan. en potential output, financial crisis O11, E32 Sep 30, 2009, 12:00:00 AM

• A Survey on Monetary Policy and Potential Output Uncertainty (PDF, 304 kB) Chiaie. Delle Chiaie – Monetary Policy and the Economy Q3/09 This study provides a survey of recent theoretical and empirical works analyzing the implications of imperfect information about potential output for the conduct of monetary policy. Using small-scale New Keynesian models, most of these studies conclude that, under optimal monetary policy, output gap uncertainty leads to persistent deviations between the actual and the perceived output gap in response to supply and cost-push shocks. As a consequence, the monetary policy stance turns out to be systematically looser than under perfect information in periods of large reductions in potential output, and overly restrictive relative to this benchmark in periods of large expansions in potential output. Although these previous studies shed light on the economic mechanisms by which the imprecise measurement of potential output may affect the policy behavior and thus, the dynamics of inflation, their quantitative findings depend on the assumptions about the information set available to the policymaker. In this respect, a useful role for unit labor costs emerges. This indicator provides information about potential output, and it strongly improves the central bank’s ability to make stabilization policy more effective. en monetary policy, potential output uncertainty, indicator variables, real unit labor costs E4, E5 Sep 30, 2009, 12:00:00 AM

• Housing Finance of Austrian Households (PDF, 481 kB) Albacete, Wagner. Albacete, Wagner – Monetary Policy and the Economy Q3/09 This study presents a first summary of the housing finance results of the OeNB’s Household Survey on Housing Wealth in Austria. 22% of Austrian households have taken out debt to finance housing. The probability of holding such debt is significantly higher for younger and higher-income households than for others. High-income households are much more likely to have a variable rate loan or a foreign currency loan, but at the same time they also have lower loan-to-value (LTV) ratios than the other groups. Regional differences – or more specifically, a west-east pattern – were identified regarding the type and amount of debt incurred: Austrian households in the western provinces tend to have higher debt and higher LTV ratios than those in the eastern provinces. Housing assistance funds and alternative forms of financing, such as inheritances or inter vivos gifts (money), play quite a significant role in housing finance. Austrian households use their property mainly for residential purposes rather than as an investment instrument: Of the households with outstanding housing loans, 74% used (at least part of) the money to purchase their primary residence, 12% used it to finance the deposit they had to make for their housing association apartment and 17% purchased a second home. 52% of the households that took out a loan to purchase a second property use it for residential or similar purposes, while 26% of them offer it for rent and the remaining households (roughly one-quarter) use it as a store of value. These facts and the existence of a strongly subsidized rental market seem to have contributed to the rather low ownership ratio and the moderate development of Austrian real estate and rental prices by international standards. The differences identified in the structure of housing finance of Austrian households suggest that the impact of monetary policy on wealth (and hence on household consumption and investment) will also differ markedly. en household’s wealth, real assets, housing finance D14, D31, R21, R31, E52 Sep 30, 2009, 12:00:00 AM

• EU Representation at the IMF – A Voting Power Analysis (PDF, 1.1 MB) Brandner, Grech. Brandner, Grech – Monetary Policy and the Economy Q3/09 To analyze the consequences of a hypothetical consolidated EU representation at the IMF, we regroup the 27 EU Member States into a euro area EU constituency and a non-euro area EU constituency (based on the IMF’s new quota formula) and calculate voting power measures as proposed by Penrose-Banzhaf (PBI) and Shapley-Shubik (SSI). For theoretical reasons and reasons of empirical plausibility, we favor the results based on the SSI. Concerning the Executive Board, our results confirm the PBI-based evidence in the literature, as we find that the two large constituencies (U.S.A and euro area) would have more voting power than their voting shares indicate. Above majority thresholds of 67%, the PBI and SSI results become increasingly divergent, with the difference being most pronounced at the majority threshold of 85%, at which the PBI has already plunged dramatically whereas the SSI remains more or less constant. Concerning the Board of Governors, we find that voting power depends on both EU-related decision rules and the power measure used. If decision-making within the group is based on EU Council votes, smaller EU Member States tend to gain voting power and would hence have an incentive to push EU consolidation. By contrast, most of the larger EU Member States tend to lose voting power and might consequently be inclined to retain the status quo. However, above all by bundling individual euro area concerns, a consolidated euro area representation would act as a booster for the euro area as a whole. en IMF, EU, voting power analysis C71, D71 Sep 30, 2009, 12:00:00 AM