Monetary Policy and the Economy Q1-Q2/19

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• Monetary Policy and the Economy Q1-Q2/19 (PDF, 4.2 MB) May 2019

Studies and Analyses

• Call for applications: Klaus Liebscher Economic Research Scholarship (PDF, 44 kB) en May 2, 2019, 12:00:00 AM

• Nontechnical summaries in English and German (PDF, 172 kB) en May 2, 2019, 12:00:00 AM

• Editorial (PDF, 78 kB) en May 2, 2019, 12:00:00 AM

• Inflation in Austria since the introduction of the euro (PDF, 783 kB) Fritzer, Rumler. Given that Austria had already pursued a fixed exchange rate regime with Germany prior to the establishment of European Economic and Monetary Union (EMU), it is unlikely that the inflation process in Austria has changed fundamentally due to the introduction of the euro. Nevertheless, according to the theory of monetary union, inflation rates and price levels should converge in a monetary union in the long run due to greater transparency and the abolition of (formal and informal) trade barriers. In this article, we investigate the inflation process in Austria in the last 20 years by analyzing the inflation-output trade-off, the degree of price flexibility as well as the development of inflation differences and price level convergence in the euro area since 1999. We find that comparatively higher inflation rates of services, in particular of catering services, have been the main reason for the above-average inflation rate in Austria since 2011. Furthermore, we find that the convergence of price levels within the euro area, as measured by the coefficient of variation between national price levels, primarily decreased in the years prior to EMU, but increased after 2007. The latter can be explained by the accession of a number of low price level countries to EMU in the years after its establishment. At the micro level, the degree of flexibility of consumer prices appears to have increased in Austria in the last 20 years, indicating that the macroeconomic frictions induced by price rigidity may have decreased in recent years. en inflation, inflation differences, price level convergence, Phillips curve, price rigidities, Austria E31, E52, F45 May 2, 2019, 12:00:00 AM

• Aggregate wage developments in Austria since the introduction of the euro (PDF, 713 kB) Fenz, Ragacs, Stiglbauer. Real gross wages per worker have experienced a very subdued development since the introduction of the single currency in Austria. Average hourly wages, on the other hand, have evolved more dynamically. Between 1999 and the Great Recession, the wage share decreased continuously, and wage growth was less than suggested by the “Benya rule.” However, having increased significantly in the aftermath of the crisis, the wage share has been fairly constant in recent years. In 2017, the wage share was only slightly lower compared to that in 1999. The institutional specifics of Austrian wage setting are unique for a developed country (neo-corporatist system, almost complete union coverage and highly coordinated wage setting). Despite declining union density, the system has remained virtually unchanged since the early 1980s. Arguably, joining Economic and Monetary Union (EMU) did not lead to pressures to change the wage bargaining process as Austria had already been part of the “hard currency bloc” in Europe before the introduction of the euro. Phillips curve estimations suggest that nominal wage growth in the past twenty years has been mainly determined by labor productivity and past inflation but has reacted only weakly to the cyclical stance of the economy. In addition, we analyze the effects that structural changes in the labor market and the internationalization of the Austrian economy have had on wage developments. We find evidence that the increased openness of the Austrian economy and changes in participation rates have had a dampening effect on wage growth. In contrast, we find no significant effects for changes in the share of part-time and fixed-term contracts, and in the share of foreign workers. The overall cumulative effect of EMU on wage growth in Austria is estimated to be positive. en wage share, collective bargaining, Austria, monetary union E25, J30, J51 May 2, 2019, 12:00:00 AM

• Financing conditions in Austria since the introduction of the euro (PDF, 779 kB) Gnan, Valderrama, Waschiczek. How have financing conditions for Austrian firms and households evolved since the start of the euro? To answer this question, we consider Austrian credit, bond and stock markets, estimate a financial conditions index and assess euro rates against a simple hypothetical monetary policy rule for Austria. We find that interest rates for bank loans have fallen since the introduction of the euro, with real interest rates being mostly lower in Austria than in Germany and the euro area average. This was partly related to the high share of variable rate loans, especially for house purchase. However, banks have compensated, at least in part, for lower interest rates by increasing non-interest price elements. Banks have also applied higher collateral requirements and loan covenants since the crisis. The post-crisis expansionary monetary policy conducted by the European Central Bank (ECB) has brought Austrian bond yields below 1% since end-2014. Earnings ratios of ATX companies were mostly below those in the DAX and Euro STOXX50. The stock earnings premium over 10-year government bonds was 2% to 3% in Austria during most of the period under review but rose substantially to around 9% in 2017/2018. A financial conditions index for Austria shows that the transmission of the policy rate through lending rates was an important driver of the tightening of financial conditions prior to and during the financial crisis. In the same way, the transmission of expansionary monetary policy through lending rates and credit risk has contributed to the loosening of financing conditions during the recovery. Judging from a hypothetical monetary policy rule for Austria, the monetary stance given by the euro area rate has been broadly adequate or slightly on the loose side in relation to economic conditions in Austria. en interest rates, credit conditions E43, G21 May 2, 2019, 12:00:00 AM

• (How) has EMU affected fiscal policy in Austria? (PDF, 504 kB) Prammer, Reiss. Since Austria joined the euro area, national budgetary policy has been influenced by EU fiscal rules to a significant extent. Above all, EU fiscal targets were key drivers behind the major consolidation episodes: consolidations either aimed at bringing the headline deficit ratio below 3% of GDP or at moving the structural budget balance closer to the medium-term objective. At the same time, the structure of expenditure and revenue continues to be under full national responsibility. While the revenue structure remained relatively stable over the last 20 years, we observe relatively strong shifts in the expenditure structure towards social transfers in kind. en fiscal rules, fiscal policy, tax and expenditure structure E62, H2, H5 May 2, 2019, 12:00:00 AM

• Monetary policy of the Eurosystem and the OeNB’s balance sheet (PDF, 560 kB) Jobst, Kwapil. Monetary policy in the euro area is decided by the Governing Council of the European Central Bank (ECB) but implemented through the balance sheets of the 19 national central banks (NCBs) of the Eurosystem. While the consolidated financial statement of the Eurosystem is the primary source of information for monetary policy in the euro area, this article takes the Oesterreichische Nationalbank as an example and argues that a disaggregated view offers additional perspectives. During the financial crisis, the balance sheets of the NCBs reflected to what extent and through which channels national banking systems were affected by the crisis. At the same time, however, NCBs’ balance sheets are driven by structural factors and contingencies completely unrelated to monetary policy. In Austria’s case, for example, the country’s special position in international banknote logistics is the key driving force behind the OeNB’s large liabilities in TARGET2. Overall, we conclude that the NCBs’ balance sheets contain valuable information on both the implementation of monetary policy as well as the operations of the financial and payment system more broadly; nevertheless, the NCBs’ balance sheets must be read with due care. en central bank balance sheet, national central banks in the Eurosystem, monetary policy implementation, TARGET2 E42, E52, E58 May 2, 2019, 12:00:00 AM

• Approaching 20 years of euro cash in Austria: What has changed, and what’s next? (PDF, 456 kB) Schautzer, Stix. This article discusses how the use of cash has evolved in Austria since euro banknotes and coins were introduced in January 2002 and how the underlying production/logistics processes have changed. Regarding the role of cash in Austria, we show that Austria is among the more cash-intensive economies within the euro area. In general, euro cash has remained an important medium of exchange and store of value. Its overall circulation has increased, in particular after the global economic and financial crisis, both in the euro area as a whole and in Austria. In the context of a growing demand for cash, we discuss how technical progress in the production of euro banknotes and in euro cash logistics has contributed to cost-efficiency. As euro cash is the joint product of all Eurosystem national central banks, we also address the role of the OeNB in the supply of banknotes. Finally, we provide a brief discussion about the likely future of cash. Overall, there are three main messages that can be drawn from our brief contribution. First, euro cash is here to stay, although it is likely that its demand will decline in the coming years, mainly due to innovations in payment technologies and prospective increases in interest rates. Second, cash is not outdated given the technical developments in cash production and dissemination, the continued use of cash by consumers and the costs of cash vis-à-vis other payment means that merchants face. Third, there is a need for more research in order to better understand the demand for cash, in particular referring to those aspects that are unrelated to short-run payment needs. en May 2, 2019, 12:00:00 AM

• The euro’s effects on noncash retail payments (PDF, 328 kB) Dorfmeister. A common European currency, while being a milestone for the European Union, was just the first step toward integrated euro payments markets. The Single Euro Payments Area (SEPA) was not born until 2014, when the migration of domestic formats and national infrastructures for credit transfers and direct debits to European technical standards and procedures was completed. While these changes have of course come at a cost for the financial industry, SEPA has definitely had an impact on the efficiency and speed of retail payments, but also on the security of transactions as well as on pricing. Some issues remain to be solved, e.g. SEPA for card transactions or IBAN discrimination. Nevertheless, SEPA migration has been a success – and, in turn, a stepping stone to further innovations, like instant payments. en May 2, 2019, 12:00:00 AM

• The case for macroprudential policy as a stabilizing tool for the euro area (PDF, 417 kB) Posch, Schmitz, Steiner, Ubl. Current account deficits are not destabilizing per se and cross-border capital flows can contribute to the economic convergence of the euro area and private risk-sharing if monitored more adequately than provided for by the current macroeconomic governance framework of the European Union. Macroprudential policy could fill this gap. This would allow countries with lower capital stocks to continue importing capital and to strengthen private risk-sharing in the euro area, while avoiding negative side effects, such as excessive credit growth and the risk of a balance of payment crisis. We make a case for broadening the EU’s macroeconomic imbalances procedure (MIP) to include the assessment of the macroprudential stance, particularly with respect to the possible negative side effects of capital inflows. Our argument is inspired by the effective application of macroprudential policy in Austria in the post-World War II era, when Austria featured a structural balance of payment deficit and liberalized both its capital account and its banking sector without a balance of payment crisis. en Macroprudential supervision, capital flows, monetary union E42, E61, F32, F33 May 2, 2019, 12:00:00 AM

• Economic growth slows in Austria as global economy weakens – Economic outlook for Austria from 2019 to 2021 (June 2019) (PDF, 927 kB) Ragacs, Vondra. en May 2, 2019, 12:00:00 AM