Monetary Policy and the Economy Q2/11

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• Monetary Policy and the Economy Q2/11 (PDF, 2.9 MB) June 2011.

Studies and Analyses

• Austria’s Economy Moves beyond the Crisis: Powerful Economic Growth Provides a Tailwind to Reduce Budget Deficits – Economic Outlook for Austria from 2011 to 2013 (June 2011) (PDF, 1.9 MB) Ragacs, Vondra. Ragacs, Vondra – Monetary Policy and the Economy Q2/11 en forecast, Austria C5, E17 Jun 30, 2011, 12:00:00 AM

• Inflation Differentials between Austria, the Euro Area, Germany and Italy (PDF, 2.3 MB) Fritzer. Fritzer – Monetary Policy and the Economy Q2/11 In Austria, inflation as measured by the HICP has been accelerating at a faster rate than in other euro area countries since late 2010. By May 2011, Austria had built up an inflation differential of 1.3 percentage points against Germany and of 0.7 percentage points against Italy. A more detailed analysis shows inflation developments in Austria to have diverged from euro area patterns above all in the food sector. This can partly be explained with the increase of the tax rate on tobacco products in Austria at the beginning of 2011. In addition, domestic food retailing market structures may have contributed to the faster and stronger pass-through of global cost shocks to consumer prices in Austria compared with other euro area countries. This study argues that retail price competition may be the key driver behind the faster and stronger pass-through. This finding would, however, have to be substantiated by a comprehensive analysis of price setting dynamics and of market structures in food retailing to be conclusive. The energy sector is another industry in which Austria recorded more rapid inflation growth than other euro area countries in early 2011, the reason being the petroleum tax increase that was implemented in 2011. The oligopolistic structure of the domestic motor fuel market calls for continued close monitoring. Service inflation accelerated to 3.3% in May 2011, significantly exceeding above all the corresponding German rate. This divergence may be attributed at least in part to country-specific effects, including the reduction of the VAT rate on accommodation services in Germany from 19% to 7% and the abolition of university tuition fees in one of Germany’s federal states in 2010. Industrial goods excluding energy also contributed to the disproportionately strong acceleration of domestic inflation in early 2011 (May: 1.9%). Above all shoe and garment prices rose comparatively faster in Austria than in Germany. Given the seasonality of price movements that is typical of nonenergy industrial goods and given the uncertainty surrounding inflation measures following the implementation of harmonized EU standards for the treatment of seasonal products in the HICP in January 2011, it is, however, too early to deduct an inflation trend in this sector at this stage. At the aggregate level, the Austrian inflation rate and its differential against other countries’ rates are expected to shrink considerably in the coming months and in 2012. According to the OeNB’s latest projections, annual Austrian HICP inflation should drop substantially from 3.2% in 2011 to 2.1% in 2012. At the same time, Austria’s inflation differential to the euro area should narrow by 0.2 to 0.5 percentage points against the euro area and by 0.1 to 0.3 percentage points against Germany and Italy. en sectoral inflation, inflation differentials E31 Jun 30, 2011, 12:00:00 AM

• Heterogeneity in Euro Area Consumers’ Inflation Expectations: Some Stylized Facts and Implications (PDF, 2.7 MB) Gnan, Langthaler, Valderrama. Gnan, Langthaler, Valderrama – Monetary Policy and the Economy Q2/11 Aggregate measures of inflation expectations mask heterogeneity among consumers. According to the theoretical and empirical literature, expectations may differ due to different information sets and “models” used by individuals. European Commission Consumer Survey data confirm considerable heterogeneity in inflation expectations over time, across countries and across demographic groups. Consistent with findings according to which financial literacy is an important determinant of inflation expectations heterogeneity, our econometric estimates show that education and income seem to play a more important role than age and gender. However, their effect on heterogeneity is nonlinear. We also find evidence of strong country-specific idiosyncrasies in the formation of inflation expectations. Overall, while showing some common tendencies, inflation expectations in the euro area continue to vary across countries and demographic groups as regards their level, driving factors and evolution over time. Employing “targeted” or “multi-tiered” communication strategies for different demographic groups and within the various euro area countries might indeed help “focus,” or “anchor,” inflation expectations around a level in line with the Eurosystem’s definition of price stability. en inflation expectations, heterogeneity, communication policies E31, E52, D83 Jun 30, 2011, 12:00:00 AM

• The Swiss Economy’s Resilience to Crisis and Its Lessons for Austria (PDF, 2.3 MB) Fuentes, Ramskogler, Silgoner. Fuentes, Ramskogler, Silgoner – Monetary Policy and the Economy Q2/11 Switzerland and Austria, two small, open economies, have emerged fairly unscathed from the financial and economic crisis. Switzerland, above all, is notable for its relative stability. Domestic demand proved to be rather resilient, and in Switzerland, foreign trade performance also contributed to stability. At the same time, the important internationally oriented financial sector of both countries, a growth engine during good times, came to represent a risk factor during the crisis. The key factors in explaining Switzerland’s resilience to the crisis are the country’s high degree of economic diversification and its specialization on/in products that are fairly robust to cyclical fluctuations. Like in Austria, a stable labor market and the absence of a real estate bubble preceding the crisis supported the economy. The stability of credit supply and the ultimately small impact of the financial crisis thanks to swift and decisive government action played an important role as well. Economic policymakers also made an important contribution to stability by reducing key interest rates, adopting economic stimulus packages, taking measures to stabilize the labor market and, above all, launching bank rescue packages to safeguard financial stability. Preventing financial crises will be a great challenge for both countries in the coming years. In Switzerland, the too-big-to-fail aspect represents a major issue, considering that the total assets of the two biggest Swiss banks – UBS and Credit Suisse – each are a multiple of Swiss GDP. en Austria, Switzerland, financial market, financial and economic crisis E50, E60, O11 Jun 30, 2011, 12:00:00 AM

• Event Wrap-Ups (PDF, 1.8 MB) Gnan, Pichler – Monetary Policy and the Economy Q2/11 en Jun 30, 2011, 12:00:00 AM