Monetary Policy and the Economy Q1/12

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• Monetary Policy and the Economy Q1/12 (PDF, 3.7 MB) March 2012.

Studies and Analyses

• The Economy has Bottomed Out (PDF, 2.4 MB) Schneider, Schreiner, Silgoner. Schneider, Schreiner, Silgoner – Monetary Policy and the Economy Q1/12 While Japan’s economy is showing the first signs of a hesitant recovery, the upturn already gained a foothold in the U.S. economy in the second half of 2011 on the back of robust domestic demand. Conditions in the labor market relaxed perceptibly, while the real estate market is still waiting for a rebound. The U.S. Federal Reserve System and the Bank of Japan changed their respective monetary policies at the beginning of 2012 to communicate their inflation goal clearly. At the same time, both central banks decided to keep their key interest rates at a historically low level for the time being. By contrast, China’s economy has lost momentum, prompting the Chinese central bank to start easing monetary policy. After the euro area economy had started to revive in the first half of 2011, conditions clouded over from mid-2011. In the fourth quarter of 2011, real GDP weakened by 0.3% against the previous quarter. With the consolidation measures required in all sectors dampening economic activity, net exports remained the only stable support for growth. In the first quarter of 2012, GDP is anticipated to decline marginally as well, but leading indicators signal that it will recover thereafter. Ongoing tensions in the bond markets that progressively spread to other financial market segments called for new monetary policy measures – the reduction of interest rates, the provision of additional long-term liquidity and the relaxation of the eligibility criteria for collateral. These measures along with the EU and international rescue packages as well as EU economic governance reforms eased tensions in the financial markets at the beginning of 2012 and restored confidence. Economic conditions deteriorated noticeably in the Central, Eastern and Southeastern European (CESEE) EU Member States until the turn of the year 2011 to 2012. In the fourth quarter of 2011, average growth in the region flagged markedly; many countries reported contracting growth. In recent months, signs of a trend reversal in the first quarter of 2012 have been mounting. However, if the rally continues beyond the first quarter of 2012, it will be very small. In 2011, the Austrian economy expanded by a stronger than expected +3.0%, but successively lost momentum in the course of the year. GDP growth, still above average in the first half of 2011, contracted slightly in the fourth quarter. Quite likely, the economy has already bottomed out. The OeNB’s Economic Indicator signals a stabilization of Austria’s economy for the first half of 2012. Despite the high employment growth recorded in 2011, which lasted into the beginning of 2012, unemployment rose somewhat. After peaking in fall 2011, inflation is currently subsiding notably. en global outlook, euro area, Central, Eastern and Southeastern Europe, Austria E2, E3, O1 Mar 31, 2012, 12:00:00 AM

• Editorial (PDF, 376 kB) Claudia Kwapil – Monetary Policy and the Economy Q1/12 en Mar 31, 2012, 12:00:00 AM

• Euro Cash in Austria, Ten Years On (PDF, 1.7 MB) Koch, Schneeberger. Koch, Schneeberger – Monetary Policy and the Economy Q1/12 In the run-up to the euro launch, a number of key steps were taken to ensure the uninterrupted supply of notes and coins to the economy and the general public. After all, nearly 15 billion notes and 52 billion coins had to be delivered in due time in order to ensure their availability from January 1, 2002, onward in the participating countries. In Austria, the Oesterreichische Nationalbank shares the responsibility of supplying commercial banks with cash and of processing returned banknotes in accordance with ECB regulations – and thus of ensuring the quality of the euro and its counterfeit security – with an affiliated cash logistics company, GELDSERVICE AUSTRIA. When the financial crisis boosted the demand for cash, logistical reserve stocks enabled the Eurosystem to respond quickly. As a result, the volume of euro cash in circulation rose, as did U.S. dollar circulation. However, the overall value of euro notes and coins in circulation has consistently remained above that of the U.S. dollar since the end of 2006. The euro’s established role as an international transaction currency has resulted in approximately one-quarter more banknotes being processed in Austria than the volume required for the national market. en currency in circulation, adjustment of banknotes in circulation, intra-Eurosystem balances, capital key M41 Mar 31, 2012, 12:00:00 AM

• Euro Cash in Central, Eastern and Southeastern Europe (PDF, 2.3 MB) Ritzberger-Grünwald, Scheiber. Ritzberger-Grünwald, Scheiber – Monetary Policy and the Economy Q1/12 A considerable part of the euro banknotes issued since 2002 is in circulation in Central, Eastern and Southeastern European (CESEE) countries. This can be attributed to the fact that numerous economic agents resorted to currency substitution in a parallel safe haven currency during the crisis arising in the course of their countries’ transition to a market economy. On the other hand, euro cash holdings are related to some countries’ upcoming accession to the European Union, which will oblige them to adopt the euro. Although countries have caught up economically, the degree of euroization in CESEE countries has hardly receded over the past years. According to surveys conducted by the Oesterreichische Nationalbank (OeNB), economically significant amounts of euro cash are primarily held by households in Southeastern Europe, which – unlike households in Central Europe – use euro cash as a store of value and partially as a means of payment in addition to their respective local currency. Policies introduced in CESEE countries to stabilize economies after the outbreak of the financial and economic crisis in 2008 have ultimately increased the public’s confidence in the security of its savings deposits. The recent drop in euro cash holdings can therefore be attributed not only to the depletion of euro cash reserves during the crisis to finance necessary expenditures. It also seems to reflect a medium-term tendency to shift portfolios from (euro) cash to (euro) deposits. en dollarization, euroization, currency substitution, household finance, transition crisis, survey data D14, E41, G11, G20, O16, N14 Mar 31, 2012, 12:00:00 AM

• The Euro – Public Opinion in the Ten Years after the Euro Changeover (PDF, 1.8 MB) Fluch, Schlögl. Fluch, Schlögl – Monetary Policy and the Economy Q1/12 Public sentiment indicators available for the period from 2002 through 2011 provide a clear profile of public opinion on the euro for Austria and partly also for the euro area. Essentially, the period following the introduction of euro banknotes and coins falls into two distinct phases during which two opposing sentiments prevailed: During the first phase, satisfaction with, and acceptance of, the euro rose to a high level until 2009, and during the second phase, the sovereign debt crisis and its consequences caused pro-euro sentiment to decline from 2010, culminating in a critical assessment during the height of the crisis in the summer and fall of 2011. Survey ratings dropped from a high positive sentiment of Austrian respondents on the euro, nearly 80%, in 2009 to approximately 60% in fall 2011. The decline in confidence in the euro appears to have been caused by EU and national policymakers struggling with crisis management rather than by the euro itself. As the runaway public debt and financial speculation are seen as the cause of the crisis, most Austrians and euro area citizens agree with financial and economic policy measures targeted at strengthening Economic and Monetary Union (EMU) in the long run. Although the euro faces great challenges, a clear majority of Austrians (and of other euro area citizens) are convinced that the euro is here to stay. People in Austria and in the euro area reported hardly any difficulties in the day-to-day use of euro cash. Some respondents are still disposed to comparing euro with schilling or other former currencies in the euro area, above all for exceptional purchases. Those surveyed overwhelmingly agree that they have personally benefited from the euro: price transparency, easier and cheaper travel, and lower costs for payment transactions are considered undisputed advantages of the single currency. Even if euro inflation has been low in the long run, people continue to associate the introduction of the euro with a rise in prices. The share of respondents who see the euro as very stable and expect it to remain so diminished noticeably in 2011 as a consequence of higher inflation. Whereas at the end of 2007 almost 80% of those surveyed considered the euro stable, this figure had fallen to just over 40% at the end of 2011. Fears of higher inflation along with a loss in the value of savings ranked as Austrians’ biggest concerns at the turn of the year 2011/2012. en confidence in the euro, euro cash, Austria, euro area E50 Mar 31, 2012, 12:00:00 AM

• How Euro Banknotes in Circulation Affect Intra-Eurosystem Balances (PDF, 1.4 MB) Krsnakova, Oberleithner. Krsnakova, Oberleithner – Monetary Policy and the Economy Q1/12 The cash changeover to the euro created the need to present banknotes in circulation in an innovative manner to allocate them adequately across the balance sheets of the Eurosystem central banks. The solution adopted was to undertake regular accounting adjustments of the circulating banknotes. This article presents the relationships between the relevant balance sheet items – primarily intra-Eurosystem balances arising from such adjustment and the liability constituted by banknotes in circulation – and provides insights into the origins of this mechanism and its legal basis. The value of euro banknotes in circulation, as now reported by 18 Eurosystem central banks (i.e. including the ECB), has risen consistently over the last ten years and now stands at around EUR 900 billion. en banknotes in circulation, adjustment of banknotes in circulation, intra-Eurosystem balances, capital key M41 Mar 31, 2012, 12:00:00 AM

• Understanding TARGET 2: The Eurosystem’s Euro Payment System from an Economic and Balance Sheet Perspective (PDF, 1.7 MB) Handig, Holzfeind, Jobst. Jobst, Handig, Holzfeind – Monetary Policy and the Economy Q4/11 TARGET2 – the Trans-European Automated Real-time Gross settlement Express Transfer System 2 operated by the Eurosystem – provides for the efficient settlement of cross-border payments in euro and is thus a key infrastructure component of European monetary union. TARGET2 claims and liabilities in the accounts of the euro area central banks have recently become a subject of public debate. However, TARGET2 balances by definition constitute intra- Eurosystem balances and are as such an integral part of the decentralized implementation of the single monetary policy. Considerable claims and liabilities can arise for various reasons, many of which are related to the normal functioning of the euro area and do not require an economic policy response. Changes in TARGET2 balances also do not imply any direct changes in the risk exposure levels of national central banks. At the same time, there is no denying that the Eurosystem is facing major challenges in its monetary and liquidity policy. TARGET2 balances are indeed currently high owing to the financial crisis, given the need to provide liquidity aid to the European banking system. Yet as soon as such liquidity aid is no longer necessary, following appropriate economic policy measures such as recapitalizing banks or measures to restore confidence in government solvency, TARGET2 balances will also decline. en TARGET2, banknotes, central bank balance sheet, ECB, Eurosystem E58, F32, F33 Mar 31, 2012, 12:00:00 AM

• The Pass-Through of Commodity Prices to Consumer Prices of Selected Products (PDF, 1.2 MB) Rumler. Rumler – Monetary Policy and the Economy Q1/12 This contribution analyzes the pass-through of various commodity prices to consumer prices of selected products in Austria. For this purpose, consumer price microdata for the period from 1996 to 2009 are mapped to the underlying disaggregated commodity prices. The duration and extent of the pass-through are found to vary considerably across products. While changes in crude oil prices turned out to have a quite substantial and quick effect on the consumer prices of super gasoline and diesel, the pass-through was rather weak for bread (bread rolls) and meat (beef steak). Of all products analyzed here, natural gas had the slowest price response, as its retail price is still partly government-controlled in Austria. Since the introduction of euro banknotes and coins in January 2002, the pass-through has increased significantly for most products under review, but we cannot infer a clear casual relationship from this result as other factors might also be responsible for the observed increase in the pass-through. In addition, the pass-through to retail prices is found to be stronger for cost hikes than for cost cuts for fuel and meat products (notably beef steak). This confirms the result of an asymmetric pass-through for fuel products found in earlier studies. en pass-through, micro prices, commodity prices, consumer prices E11, C33 Mar 31, 2012, 12:00:00 AM

• Price Level Convergence Before and After the Advent of EMU (PDF, 1.9 MB) Fritzer. Fritzer – Monetary Policy and the Economy Q4/11 This article explores the convergence in consumer prices for groups of countries within the European Economic and Monetary Union (EMU) and for selected non-EU countries, using detailed product-level data for 35 goods and services. It also analyzes the price gap between Austria and its major trading partners Germany and Italy. Within the euro area (the 11 founder members), price level convergence has been found to have occurred primarily in the run-up to the launch of euro banknotes and coins. Only in the case of consumer goods, such as personal transport equipment, clothing and footwear, and audio-visual, photographic and information processing equipment, did price levels continue to converge across the euro area countries also after the cash changeover. Compared with the other groups of countries reviewed here, food and services price levels converged to a much lesser extent or not at all in the euro area. However, during the whole period considered the variation in consumer prices was lowest in the euro area. Price level comparisons carried out between Austria and Germany/Italy revealed convergence in the case of both consumer goods and services, except for food prices. The latter is likely to have been due primarily to structural changes in retail trade: while in many sectors the trend decline in labor costs and profit margins and moderate deregulation may have contributed to price convergence between Austria and its trading partners, the Austrian food sector has displayed a trend toward rising labor costs. Another driver of food price differences is the VAT applied to food products, which is higher in Austria than in Germany or Italy. en economic integration, prices, euro E31, F15 Mar 31, 2012, 12:00:00 AM