Monetary Policy and the Economy Q3-4/16

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• Monetary Policy and the Economy Q3-4/16 (PDF, 3.3 MB) September 2016

Studies and Analyses

• Call for applications: Visiting Research Program (PDF, 60 kB) en Sep 12, 2016, 12:00:00 AM

• A (not so brief ) history of inflation in Austria (PDF, 954 kB) Beer, Gnan, Valderrama. We analyze the eventful history of inflation in Austria over the past two centuries against the background of institutional, economic and political developments. Ultra-high inflation or hyperinflation resulted from repeated monetary financing of war expenses, war-related destruction of productive capacity as well as fear of short-term political and social consequences of anti-inflationary measures. Like other countries, Austria experienced the highest inflation during peaceful times in the 20th century when efforts were made to cushion the negative output effects of oil price shocks. Inflation volatility was high in the 19th century up to the Gründerzeit boom and in the 20th century during the Great Inflation; it was low in the half-century up to World War I and during the Great Moderation. Our frequency domain analysis for the pre-World War I and post-World War II periods finds that, in line with the economic literature, the correlation between money growth and inflation is considerably higher for long and very long frequencies than for business cycle frequencies. The varying correlation between money and inflation reflects changing monetary regimes. We cannot establish a stable empirical Phillips curve relationship; in the post-World War II period, the relationship breaks down once supply shocks (oil prices) are included. Deflation was quite frequent in 19th-century Austria and was not necessarily associated with recessions. By contrast, Austria’s 20th century Great Depression fits the textbook notion of deflation, high unemployment and economic slack. Formal central bank independence did not prevent the erosion of monetary value in “emergency situations” of wars. Hyperinflations and currency reforms repeatedly inflicted substantial and long-lasting damage on citizens’ trust in state money and in the state more generally. en inflation, Austria E58, N13, N14 Sep 12, 2016, 12:00:00 AM

• The measurement of inflation in Austria: a historical overview (PDF, 398 kB) Fluch. Calculation of the first price indices at the international level began as early as the start of the 18th century. In Austria, consumer price indices (CPIs) have been consistently available since 1800. Though simple, the indices followed today’s basic structure, and chaining the various generations of indices allows for conclusions to be drawn on inflation rate trends, adjustments for inflation and indexation for a period now spanning more than 200 years. This article covers a historical period extending from the first calculations of inflation to the complex criteria that determine inflation measurement in Austria today. A historical analysis of the trend in Austrian household expenditures as a key determinant of the basket-of-goods structure of price indices illustrates the long-term shift in spending from basic necessities to upscale goods and services. In 2016, Austrian households are spending only around 25 % of their total expenditure on basic necessities. Over the past 100 years, the number of items in the basket of goods and services has increased 40-fold (from 20 to approximately 800 items), and the number of price reports that are included in the monthly inflation calculations has risen from fewer than 100 to more than 40,000 in 2016. Another point of focus is the causes of measurement inaccuracies – which have always existed in the calculation of inflation – and the methods for correcting them. Austria’s accession to the EU and, subsequently, Economic and Monetary Union (EMU) with its supranational monetary policy instigated a process of restructuring and, more importantly, harmonizing inflation measurement. The Harmonised Index of Consumer Prices (HICP), which has been computed since 1996 to supplement the national indices, is now the primary indicator of inflation under the Eurosystem’s monetary policy strategy. Finally, this article concludes with a discussion of the measurement factors required to be used in the calculation of the Austrian CPI and HICP under EU law as well as the conceptual differences still existing between these two inflation parameters. en History of inflation measurement, Austria B10, E31, N3 Sep 12, 2016, 12:00:00 AM

• Two centuries of currency policy in Austria (PDF, 409 kB) Handler. This paper is devoted to currency policies in Austria over the last 200 years, attempting to sketch historical developments and uncover regularities and interconnections with macroeconomic variables. While during the 19th century the exchange rate resembled a kind of technical relation, since World War I (WW I) it has evolved as a policy instrument with the main objectives of controlling inflation and fostering productivity. During most of the 200-year period, Austrian currencies were subject to fixed exchange rates, in the form of silver and Gold standards in the 19th century, as a gold-exchange standard and hard currency policy in much of the 20th century, and with the euro as the single currency in the early 21st century. Given Austria’s euro area membership, national exchange rate policy has been relinquished in favor of a common currency which itself is floating vis-à-vis third currencies. Austria’s predilection for keeping exchange rates stable is due not least to the country’s transformation from one of Europe’s few great powers (up to WW I) to a small open economy closely tied to the large German economy. en currency history, exchange rate policy, central bank, Austria E58, F31, N13, N14, N23, N24 Sep 12, 2016, 12:00:00 AM

• The financial relations between the Nationalbank and the government (PDF, 575 kB) Köhler-Töglhofer, Prammer, Reiss. The privilegirte oesterreichische National-Bank was founded in 1816, but the central government has held a major share in the Austrian central bank only since 1955. However, the government has always participated significantly in the Nationalbank’s profits via various channels. In this paper we analyze the financial relations between the Nationalbank and the Austrian (or Austro-Hungarian) government over the last 200 years. While today, the Austrian government’s share in the effective profit distribution of the Oesterreichische Nationalbank(OeNB) is 100% (and thus much above 19th-century levels), the OeNB’s holdings of Austrian government debt were relatively small from the mid-1950s until recently. The Eurosystem’s Public Sector Purchase Programme is currently leading to a significant increase in holdings of Austrian government debt recorded at OeNB’s balance sheet. It will likely go somewhat above the levels observed from the 1830s to the 1890s, when average inflation was around ½%. en economic history, public debt, inflation, central banks N13, N14, N43, N44 Sep 12, 2016, 12:00:00 AM

• Florin, crown, schilling and euro: an overview of 200 years of cash in Austria (PDF, 645 kB) Jobst, Stix. This article provides an overview of the supply and demand for cash in Austria over the past 200 years. After looking at the government, mint and central bank as cash providers and tracing the composition of cash supply, the article presents several stylized facts about the long-run evolution of cash demand. Results show a relatively stable currency-to-GDP ratio, which is remarkable, given the structural changes in the economy and advances in payment Technologies over the past 200 years. Among possible explanations is that innovations have significantly increased the use of close cash substitutes like deposits without, however, reducing the currency-to-GDP ratio. Second, factors like the increasing monetization of the economy during the 19th century might have compensated for the cash-saving impact of financial innovations. Moreover, most of the demand for cash might not be susceptible to payment innovations as it is driven by hoarding. Finally, large political disruptions i.e. times of elevated economic uncertainty, and systemic banking crises exert strong and persistent effects on the use of cash. en currency, cash, long-run development, payment systems, Austria-Hungary, Austria E51, E42, N13, N14 Sep 12, 2016, 12:00:00 AM

• Cashless payments in Austria: the role of the central bank (PDF, 423 kB) Kernbauer. en economic and banking history of Austria, development of bank-based payment systems, role of the Austrian central bank E42, E50, E58 Sep 12, 2016, 12:00:00 AM

• Principles, circumstances and constraints: the Nationalbank as lender of last resort from 1816 to 1931 (PDF, 448 kB) Jobst, Rieder. en central bank, Austria, Oesterreichische Nationalbank, lender of last resort, financial crisis, banking crisis, credit rationing, liquidity crisis, bank run, moral hazard, Bagehot E58, G01, N13, N14 Sep 12, 2016, 12:00:00 AM

• The changing role of macroprudential policy in Austria after World War II (PDF, 410 kB) Döme, Schmitz, Steiner, Ubl. The need for and implementation of macroprudential supervision was a key lesson from the global financial crisis of 2008. However, historical protocols, legislation, policy agreements as well as the literature bear witness of a longer history of macroprudential policy in Austria: it predates the crisis by about 60 years during which it gradually evolved. We argue that careful analysis of this history provides interesting insights for current policymakers. We identify the following key lessons from analyzing the changing legal nature, motivation and effectiveness of macroprudential policy in Austria: first, macroprudential policy requires a sound legal basis; second, measures have to be quite intrusive to effectively curtail the build-up of systemic risk. Less intrusive measures become effective above all by increasing the shock-absorbing capacity of the financial system, once systemic risks materialize. en history of Austrian macroprudential policy, credit control agreements, minimum liquidity requirements, Limes, Kreditplafond, capital buffers E50, E60, G20, N24 Sep 12, 2016, 12:00:00 AM

• The OeNB’s reaction to the end of the Bretton Woods system: tracing the roots of the Indicator (PDF, 275 kB) Schmitz. In response to the end of the Bretton Woods system, the Oesterreichische Nationalbank(OeNB) aimed at keeping the value of the Austrian schilling stable vis-à-vis the currencies of the country’s main trading partners. The OeNB’s solution for achieving this objective was to introduce an internal target for the exchange rate between the Austrian schilling and the U.S.dollar (USD) based on a method called the Indicator. This paper investigates the origins of this Indicator. It finds that it was an ad hoc innovation developed by the OeNB during the days before August 25, 1971, in response to political opposition to its initial plans to revalue the Austrian schilling in line with the Deutsche mark and the Swiss franc only. The Indicator enabled the central bank to channel the political opposition into a technical debate and to make some concessions on details such as the composition of the currency basket. At the same time, it helped manufacture consent regarding the cornerstones of the new strategy, namely the stability of exchange rates vis-à-vis the main trading partners and a managed float vis-à-vis the U.S. dollar. The OeNB thereby preserved the traditional consensus in Austrian Exchange rate policy, despite the fundamental shift from the traditional export-oriented to a stability-oriented exchange rate policy which took place in the early 1970s. en Austrian economic history, monetary and exchange rate policy, Bretton Woods, currency baskets E40, N10 Sep 12, 2016, 12:00:00 AM