Calendar of Monetary and Economic Highlights
Money and Credit in 2002
Balance of Payments in the First Three Quarters of 2002
Austria“s Portfolio Investment Position in the Third Quarter of 2002
"Finance for Growth"
Finance for Growth, Finance and Growth, Finance or Growth …?
Three Perspectives on the Interaction of Financial Markets and the Real Economy
Observers will find at least one common economic theme running through the 20th century: financial market development (as impressively documented by Kindleberger ). From the wide range of aspects related to "finance and growth," to which this entire volume of Focus on Austria is dedicated, this introductory paper highlights three selected issues that are fundamental to finding adequate policy prescriptions for economic policy decision-making and that are key to the current discussion: (i) "does finance matter," (ii) what are the essential functions of financial markets and the important characteristics of financial market transactions, and (iii) which financial system is preferable, a perennial topic of debate. The paper concludes that first, almost by definition, functional efficiency is the priority a financial system needs to fulfill from a macroeconomic point of view. Factors determining the transfer of financial funds to investors are essential for the potential level of investment and the growth path of the economy to be realized. Second, combining the different historical, economic policy and financial market perspectives, there seems to be a clear need for a paradigm shift in economics, in the direction of a macroeconomic theory integrating financial markets and their impact on real developments into the core of the analysis.
Stock Markets, Shareholder Value and Investment
The paper explores the effects of stock markets on business investment. Next to the direct finance effect several indirect channels are identified and discussed, i.e. the allocation of investment, the effects through balance sheets on the stability of the financial systems, the wealth effect on consumption and corporate governance effects. Among these, the intuitively appealing direct effect and the indirect corporate governance effect are discussed most extensively. The empirical evidence regarding the financing effect is clear, if surprising. Stock markets play little role in financing investment and investment reacts little, if at all, to changes in share prices. Changes in corporate governance have become prominent recently. The paper proposes a post-Keynesian model thereof and presents evidence that the increase in shareholder power may have reduced investment.
Financial Development and Macroeconomic Volatility: Evidence from OECD Countries
This paper discusses the link between financial development and macroeconomic volatility by exploring some of the ways through which financial development may affect business cycle fluctuations. To be specific, we examine whether stock market development exerts an unambiguous effect on macroeconomic volatility. Building on theoretical work related to two different strands, we also investigate the role financial development has in the propagation of real and monetary shocks. Using a panel data set covering 22 OECD countries over the period 1971 through 2000 we find a robust relationship between stock market development and the severity of the macroeoconomic cycle, and evidence that well-developed financial systems magnify monetary shocks and dampen real ones. The results also indicate that the size of the stock market matters when interacting with stock market volatility.
A Financial Decelerator in Europe? Evidence from Austria
This paper analyzes some reasons for the apparent success of financial liberalization in Austria. Against the odds, Austria“s ambitious program of deregulation between 1977 and 2000 did not result in a financial crisis, but yielded large and tangible benefits. While the Austrian experience has so far not attracted much attention in the literature, it may contain important lessons on policy best practices, and on the transmission mechanism of monetary policy. Three implications emerge from this study: First, gradualism worked well. The slicing of reforms into manageable pieces avoided a cumulation of risk factors and the emergence of financial bubbles. Second, financial reform was timed in a countercyclical manner, which added stability to the economy. Finally, a large banking sector may be more diverse and able to stabilize itself. The predominance of financial networks and nonprofit banks in Austria gave rise to countercyclical lending behavior, i.e. a financial decelerator.
Banking Structure and Investment in Austria: Some Empirical Evidence
This study confirms that the liquid-assets-to-capital ratio is an important determinant of investment. Furthermore, given the characteristics of the Austrian financial system, this paper investigates the role of lending relationships on the investment of a sample of Austrian firms. It is found that the existence of a house bank matters for investment, but the direction of the change is not always as expected. This study also deals with the effect of banking structure on investment. Contrary to expectations and to findings for other countries, small firms benefit more by having narrow lending relationships with a large bank.
Corporate Governance, Investment, and the Implications for Growth
This paper finds that the corporate governance environment of a firm affects the relationship between investment and cash flow. The relation differs systematically across identities of controlling owners. For a sample of Austrian nonfinancial firms, we find that family-controlled firms appear to suffer from cash constraints as evidenced by a positive and robust relationship of investment to cash flow. State-controlled firms also exhibit a positive and significant cash-flow sensitivity, which we explain by managerial discretion. We do not find cash flow-induced investment spending for bank-controlled firms. Our results have important implications for the nexus between finance and growth: We show that some firms underinvest while at the same time some firms overinvest. Better, and presumably, larger financial markets, by more efficiently screening the investment opportunities of the firm, may affect economic growth.
"Finance for Growth" Panel Discussion: What Kind of Financial System Works Best for Europe?