Call for applications: Klaus Liebscher ­Economic Research Scholarship

Please e-mail applications to scholarship@oenb.at by the end of October 2021. Applicants will be notified of the jury’s decision by end-November 2021.

The Oesterreichische Nationalbank (OeNB) invites applications for the “Klaus ­Liebscher Economic Research Scholarship.” This scholarship program gives outstanding researchers the opportunity to contribute their expertise to the research activities of the OeNB’s Economic Analysis and Research Department. This contribution will take the form of remunerated consultancy services.

The scholarship program targets Austrian and international experts with a proven research record in economics and finance, and postdoctoral research experience. Applicants need to be in active employment and should be interested in broadening their research experience and expanding their personal research ­networks. Given the OeNB’s strategic research focus on Central, Eastern and Southeastern Europe, the analysis of economic developments in this region will be a key field of research in this context.

The OeNB offers a stimulating and professional research environment in close proximity to the policymaking process. The selected scholarship recipients will be expected to collaborate with the OeNB’s research staff on a prespecified topic and are invited to participate actively in the department’s internal seminars and other research activities. Their research output may be published in one of the department’s publication outlets or as an OeNB Working Paper. As a rule, the consultancy services under the scholarship will be provided over a period of two to three months. As far as possible, an adequate accommodation for the stay in Vienna will be provided. ¹

Applicants must provide the following documents and information:

• a letter of motivation, including an indication of the time period envisaged for the consultancy
• a detailed consultancy proposal
• a description of current research topics and activities
• an academic curriculum vitae
• an up-to-date list of publications (or an extract therefrom)
• the names of two references that the OeNB may contact to obtain further information about the applicant
• evidence of basic income during the term of the scholarship (employment contract with the applicant’s home institution)
• written confirmation by the home institution that the provision of consultancy services by the applicant is not in violation of the applicant’s employment contract with the home institution

Nontechnical summaries

in English and German

Nontechnical summaries in English

How effective were measures introduced in the COVID-19 crisis in supporting household incomes?

Susanne Maidorn, Lukas Reiss

We analyze how the COVID-19 crisis has affected the distribution of income in Austria using a microsimulation model developed by the Office of the Fiscal Advisory Council (FISKSIM). Starting point: In 2020, more than one-third of Austrian households were affected, at least temporarily, by unemployment, short-time work or lower self-employed income. The Austrian government introduced fiscal measures to support household incomes, which, overall, clearly cushioned the financial impact of the crisis on households. We find that, by comparison, lower-income households benefited more strongly from relief payments, mainly because of measures that were specifically targeted at low-income earners, such as payments from the family hardship fund, and additional support for the unemployed. Within the ­different income groups, households that suffered larger financial losses because of the pandemic, on average, benefited the most from COVID-19 relief in Austria, particularly from instruments specifically designed to compensate for such losses (e.g. the hardship fund and family hardship fund). Indirectly, this also applies to the use of short-time work, which helped avoid higher income losses caused by unemployment.

Corporate equity finance in Austria – impediments and possible improvements

Peter Breyer, Eleonora Endlich, Dieter Huber, Doris Oswald, Christoph Prenner, Lukas Reiss, Martin Schneider, Walter Waschiczek

This study gives an overview of the role equity – as opposed to debt – plays in the funding of Austrian companies. ­Essentially, we address the challenges companies face in raising equity in Austria and present ways forward, including international best practices. In greater detail, we first discuss the equity ratios of Austrian companies before and after the onset of the COVID-19 pandemic. Austrian businesses had been steadily increasing equity funding in the years ­before the pandemic, and their equity ratios even caught up with the international average. Naturally, the pandemic has since been weighing considerably on the equity levels of Austrian companies. The decrease would, however, be twice as high in the absence of the support measures taken to cushion the economic effects of the pandemic. Second, we show that ownership of Austrian corporate equity is broadly distributed across all economic sectors. The bulk of Austrian companies’ equity is sourced from the rest of the world and from the domestic private sector, i.e. households and ­private foundations, while the financial sector plays only a minor role in providing equity. Third, we discuss what makes equity financing difficult, drawing on the results of a structured OeNB survey conducted with businesses and other stakeholders and on talks with international institutional investors. Why would business owners hesitate to raise capital externally? For example, they may be reluctant to share control with external investors and may face ­information deficits and data gaps as well as differences in the tax treatment of debt and equity. On the supply side, equity is limited because investors lack information on the economic situation of capital-seeking companies and because investments in unlisted companies are less liquid. Fourth, we outline possible avenues for strengthening corporate equity in Austria. Cases in point, which were identified together with representatives of national and international institutions and market participants, include providing both tax incentives and intermediation support for equity finance and establishing ­public-private partnerships.

The impact of climate change on monetary policy

Andreas Breitenfellner, Wolfgang Pointner

Climate change poses risks to the stability of economic and financial systems. These risks affect the mission of central banks to maintain monetary and financial stability. Hence, the aim of this article is to clarify to what extent central banks may, can and should take climate change into account in monetary policy decision-making. Rising temperatures, extreme weather events and the political and technological responses to climate change may have significant effects on prices, output or financial markets. Monetary policymakers need to reflect these effects in their assessment of inflationary risks. These effects might also decrease the natural rate of interest, thus reducing ­central banks’ room for ­maneuver in monetary policy. At the same time, climate change increases uncertainty about future economic developments as global warming drives global temperatures to new record highs, making the resulting ­environmental, social and financial impacts difficult to estimate. Without prejudice to the objective of price stability, the Eurosystem’s ­monetary policy mandate also provides for the support of general economic policies in the European Union. These general economic policies include achieving a high level of environmental protection. However, this is not to say that central banks should steer climate policy; this responsibility lies with governments and parliaments. Through carbon taxes, emissions trading schemes, direct regulations or green industrial policies, ­governments and parliaments can ­support the transition to a carbon-neutral economy more effectively and efficiently than monetary policymakers would be able to. Especially fiscal policy can and should correct market failure in ­pricing emissions harmful to the climate by setting carbon prices. Cost transparency and a well-managed transition would also lower the risks to financial stability. Managing climate-­related financial risks is a challenge for financial institutions and central banks, but financial markets can only function efficiently when these risks are correctly priced. Monetary policy has a range of tools at its disposal that may be used to fight climate change. The framework for credit operations, collateral policies, asset purchases or asset quality ­assessment and disclosure could be adjusted to reflect climate-related risks and to contribute to the decarbonization of the economy. Although monetary policy ­activities have until now been governed by the principle of market neutrality, it is becoming increasingly clear that it would not be meaningful to stick to strict market neutrality in view of climate-related forms of market failure. A good starting point for central banks would appear to adopt a risk-­oriented approach. In this spirit, one of the goals of the ECB’s new monetary policy strategy is to ­incorporate climate factors in its monetary policy analyses. Moreover, the ECB will adjust its operational framework for monetary policy with regard to disclosure, risk assessment, asset ­purchases and the collateral framework. Climate-aware policies have also been embraced by central banks beyond the euro area, including Sveriges Riksbank (which leans toward a ­risk-based ­approach) and the Bank of England (which leans toward a proactive approach). Whatever approach central banks choose, outcomes might be similarly ambitious. In any case, financial market supervision and monetary policy will complement but never replace governments’ ­decarbonization efforts. Our contemplations square well with the ECB’s action plan, which is a result of its monetary policy strategy review and which was presented in July 2021. In this action plan, the Governing Council of the ECB commits to further ­incorporating climate change considerations into its ­monetary policy framework and operations. In order to achieve a climate-neutral economy by the mid-21st century, all public and private economic actors will have to contribute ­according to their capabilities.

Nontechnical summaries in German

Treffsicherheit der Maßnahmen zur Stützung der Haushaltseinkommen während der ­COVID-19-Krise in Österreich

Susanne Maidorn, Lukas Reiss

Die vorliegende Studie analysiert die Verteilungswirkungen der COVID-19-Krise auf Basis des Mikrosimulations­modells des Büros des Fiskalrats (FISKSIM). Mehr als ein Drittel der österreichischen Haushalte war im Jahr 2020 zumindest temporär von Arbeitslosigkeit, Kurzarbeit oder von Verlusten an Selbstständigeneinkommen betroffen. Die fiskalischen Maßnahmen zur Stützung der Haushaltseinkommen federten die Effekte der Krise insgesamt deutlich ab. Zudem haben niedrige Einkommen relativ stärker von den geleisteten Auszahlungen profitiert. Dies lag vor allem an Maßnahmen, die explizit auf niedrige Einkommen ausgerichtet waren, wie der Familienhärteausgleich, oder gezielt bei Arbeitslosigkeit ausgezahlt wurden. Gleichzeitig profitierten innerhalb der verschiedenen Einkommensgruppen jene Haushalte stärker, die durch den COVID-19-Schock stärkere finanzielle Verluste erlitten hatten. Hierzu trugen vor allem jene Maßnahmen bei, die auf eine Kompensation dieser Verluste ausgerichtet waren, wie der Härtefallfonds und der Familienhärteausgleich. Indirekt trifft das auch für die Inanspruchnahme der Kurzarbeit zu, durch die höhere ­Einkommensverluste im Fall von Arbeitslosigkeit vermieden werden konnten.

Eigenkapitalausstattung österreichischer Unternehmen – Hindernisse und Handlungs­optionen

Peter Breyer, Eleonora Endlich, Dieter Huber, Doris Oswald, Christoph Prenner, Lukas Reiss, Martin Schneider, Walter Waschiczek

Diese Studie gibt einen Überblick über die Eigenkapitalausstattung österreichischer Unternehmen und zeigt aktuell bestehende Hemmnisse in der Eigenkapitalfinanzierung sowie Optionen zu deren Überwindung auf. Sie gliedert sich in vier Teile: Der erste Abschnitt betrachtet die Eigenkapitalausstattung der österreichischen Unternehmen vor und während der COVID-19-Pandemie. Dabei zeigt sich, dass sich die Eigenkapitalquote der Unternehmen in Österreich in den Jahren vor der Pandemie stetig verbessert hat und mittlerweile im internationalen Durchschnitt liegt. Allerdings dürfte die COVID-19-Pandemie auch unter Berücksichtigung aller derzeit bekannten Hilfsmaßnahmen die Eigenkapital­ausstattung der österreichischen Unternehmen deutlich reduzieren, ohne Hilfsmaßnahmen würde sie allerdings ­doppelt so stark sinken. Im zweiten Teil wird gezeigt, dass die Eigenkapitalgeber der österreichischen Unternehmen breit über alle volkswirtschaftlichen Sektoren gestreut sind. Die Eigenkapitalaufbringung des österreichischen Unternehmenssektors erfolgt zu einem wesentlichen Teil aus dem Ausland und von inländischen Privaten, bestehend aus privaten Haushalten und Privatstiftungen, während der Anteil des Finanzsektors am Eigenkapitalaufkommen relativ gering ist. Im dritten Teil werden aktuelle Hemmnisse betreffend die Aufbringung von Eigenkapital diskutiert, ­basierend auf einer strukturierten Befragung relevanter Interessensverbände und Unternehmen sowie Gesprächen mit internationalen institutionellen Investoren. Hemmnisse betreffend die Nachfrage der Unternehmen nach Eigenkapital umfassen etwa die Ablehnung der Einflussnahme durch externe Investoren, Informations- und Datendefizite seitens der Unternehmen und die steuerliche Diskriminierung von Eigenkapital gegenüber Fremdkapital. Das Angebot von Eigenkapital wird durch Informationsdefizite bezüglich der wirtschaftlichen Lage kapitalsuchender Unternehmen, die geringe Liquidität einer Beteiligung an nicht börsennotierten Unternehmen sowie fehlendes Finanzwissen auf ­Investorenseite beeinträchtigt. Im vierten Teil werden Möglichkeiten zur Stärkung der Eigenkapitalbasis von Unternehmen in Österreich skizziert. In den Gesprächen mit Expertenorganisationen und Marktteilnehmern wurden als mögliche Maßnahmen zur Stärkung der Eigenkapitalausstattung vor allem steuerliche Fördermaßnahmen, ­Investitionen in Eigenkapital durch Intermediäre sowie staatliche Unterstützungsmaßnahmengenannt.

Die Auswirkungen des Klimawandels auf die Geldpolitik

Andreas Breitenfellner, Wolfgang Pointner

Der Klimawandel ist eine grundlegende Herausforderung für die Stabilität von Volkswirtschaften und Finanzmärkten. Notenbanken, deren Auftrag die Wahrung dieser Stabilität ist, müssen sich mit daher mit dem Klimawandel und seinen Folgen beschäftigen. In diesem Artikel wollen wir daher die Fragen beantworten: Inwieweit darf, kann und soll die Geldpolitik der Notenbanken den Klimawandel in ihre Entscheidungen einbeziehen? Steigende Temperaturen, extreme Wetterereignisse und die politischen und technologischen Reaktionen auf den Klimawandel können erhebliche ­Auswirkungen auf Preise, Produktion oder Finanzmärkte haben. Die Geldpolitik muss diese Auswirkungen bei ihrer Beurteilung der Risiken für die Preisstabilität berücksichtigen. Diese ­Auswirkungen können auch den Gleichgewichtszinssatz verringern, was den geldpolitischen Spielraum der Zentralbanken ­einschränken würde. Der Klimawandel ­erhöht auch die Unsicherheit über die künftige ­Entwicklung der Wirtschaft, da die globale Erwärmung Temperaturen erreichen wird, die noch nie gemessen wurden, und deren ökologische, soziale und ­finanzielle Effekte daher nicht gut abschätzbar sind. Soweit dies ohne Beeinträchtigung des Preisstabilitätsziels möglich ist, sieht das Mandat des Eurosystems vor, dass die Geldpolitik des Eurosystems auch die ­allgemeine Wirtschaftspolitik in der Union unterstützt. Zu diesen Zielen der allgemeinen Wirtschaftspolitik zählt auch ein hohes Maß an Umweltschutz und Verbesserung der Umweltqualität. Zentralbanken machen aber keine Klimapolitik, das ist die Aufgabe von Regierungen und ­Parlamenten. Diese ­können durch CO2-Steuern, Emissionshandelssysteme, direkte Regulierungen oder grüne Industriepolitik den Übergang zu einer CO2-neutralen Wirtschaft effektiver und effizienter unterstützen als die Geldpolitik. Insbesondere die Fiskal­politik kann und soll durch CO2-Preise das Marktversagen bei der Bepreisung von klimaschädlichen Emissionen ­korrigieren. Kostenwahrheit und ein gut gemanagter Übergang würden auch die Risiken für die Finanzmarktstabilität verringern. Das Management dieser klimabedingten Finanzrisiken ist eine Herausforderung für Finanzinstitute und Notenbanken, denn nur wenn diese Risiken auch korrekt bepreist werden, können Finanzmärkte effizient funktionieren. Der Geldpolitik stehen mehrere Instrumente zur Verfügung, die zur Bekämpfung des Klimawandels eingesetzt werden könnten. Der Rahmen für Kreditgeschäfte, Sicherheitenpolitik, Wertpapierkäufe oder die Bewertung und ­Offenlegung der Qualität von Vermögenswerten könnte angepasst werden, um klimabedingten Risiken Rechnung zu tragen und damit zur ­Dekarbonisierung der Wirtschaft beizutragen. Während bisher die geldpolitischen ­Aktivitäten dem Grundsatz der Marktneutralität unterworfen waren, setzt sich die Erkenntnis durch, dass dies angesichts der ­klimabedingten Marktversagensformen wenig zielführend wäre. Ein ­risikoorientierter Ansatz der Zentralbanken scheint ein guter Ausgangspunkt zu sein. In ­diesem Sinne beinhaltet die neue geldpolitische Strategieerklärung der EZB das Ziel, dass ­Klimafaktoren in künftige geldpolitische Analysen einfließen werden. Auch in Bezug auf ­Offenlegung, Risikobewertung, Ankauf von Vermögenswerten und dem Sicherheitenrahmen werden Anpassungen angestrebt. Auch außerhalb des Euroraums gibt es Beispiele für unterschiedliche Ansätze klimabewusster Geldpolitik, z. B. die schwedische Riksbank oder die Bank of England. Welchen Ansatz die Zentralbanken auch immer wählen, Finanzmarkt­aufsicht und Geldpolitik werden die Dekarbonisierungsbemühungen der Regierungen ­ergänzen, aber können diese niemals ersetzen. Unsere Überlegungen passen gut zu dem kürzlich vorgelegten Aktionsplan der EZB, der ein Ergebnis der jüngsten Überprüfung der geldpolitischen Strategie ist. Der EZB-Rat zeigt sich damit entschlossen, Klimaschutzaspekte stärker in seinen geldpolitischen Handlungs­rahmen einfließen zu lassen, seine Analysekapazitäten im Hinblick auf den Klimawandel ­auszubauen und bei geldpolitischen Geschäften Klimaschutzaspekte zu berücksichtigen. Um bis Mitte des 21. Jahrhunderts eine klimaneutrale Wirtschaft zu erreichen, werden alle ­öffentlichen und privaten Wirtschaftsakteure entsprechend ihren Fähigkeiten dazu beitragen müssen.

Economic situation in Austria

Austrian economy growing strongly in mid-2021

Friedrich Fritzer, Martin Schneider, Richard Sellner, Klaus Vondra ²

The Austrian economy continued to recover in mid-2021. In the second quarter, real GDP grew by 3.6% compared with the previous quarter as the easing of containment measures led to significant growth. At the same time, the construction and industry sectors experienced a slowdown. According to leading short-term indicators, strong growth is expected to continue in the third quarter. One of the reasons is that summer tourism might reach its pre-crisis levels much faster than anticipated due to the sharp increase in overnight stays of Austrian, German and Dutch guests. On the other hand, industry climate indicators as well as current export trends show first signs of cooling. Owing to supply bottlenecks and shortages in materials, manufacturing businesses are increasingly struggling to handle large amounts of orders. Compared to Austria, Germany is being hit significantly harder by these bottlenecks because of its position in the supply chain and the fact that the automotive industry plays a more important role in Germany’s economy. Current economic projections point to growth between 3½% and 4% in 2021 and a growth rate of 4% to 5% in 2022. The fourth wave of the COVID-19 pandemic, however, poses a downside risk to the outlook. Following a marked increase of HICP inflation in Austria in the first five months of the year, the inflation rate remained at 2.8% in June and July 2021 and then climbed to 3.2% in August. The rise in inflation measured in 2021 to date was mainly driven by rising energy prices, which accounted for three-fourths of the increase. Close to one-fourth of the rise is attributable to nonenergy industrial goods and food, whereas the latest inflation rate for services was somewhat below the level measured in early 2021. By August, core inflation climbed to 2.5%, 0.5 percentage points beyond the January 2021 value.

1 Revision of national accounts: domestic economy recovered at a somewhat slower pace in the second quarter

Table 1: National accounts data for Austria (Q2 data published on September 2, 2021)  

	GDP	Private consumption	Government consumption	Gross fixed capital formation	Exports	Imports	Domestic demand (without inventories)	Net exports	Changes in inventories	Statistical discre­pancy
	Change on previous period in %						Contribution to GDP growth in percentage points
Q1 20	–2.2	–3.4	+0.6	–0.3	–5.0	+0.2	–1.7	–3.0	2.0	0.5
Q2 20	–10.9	–12.4	+1.3	–8.4	–18.6	–16.8	–8.1	–1.4	–0.6	–0.9
Q3 20	+11.0	+14.8	+1.1	+7.7	+17.5	+11.8	9.5	3.0	–2.0	0.4
Q4 20	–2.5	–6.0	+1.7	–1.2	+1.2	+5.4	–3.0	–2.1	2.2	0.4
Q1 21	–0.2	–1.6	+1.2	+4.7	–2.9	+2.3	0.6	–2.9	1.9	0.2
Q2 21	+3.6	+3.2	+2.9	+1.8	+7.1	–2.1	2.6	5.0	–2.4	–1.7
2017	+2.5	+1.9	+0.9	+4.0	+5.7	+5.8	2.1	0.2	0.1	0.1
2018	+2.5	+1.1	+1.2	+4.0	+4.9	+4.6	1.7	0.3	0.4	0.1
2019	+1.4	+0.8	+1.4	+3.9	+2.9	+2.5	1.6	0.3	–0.7	0.2
2020	–6.3	–8.1	+2.4	–5.3	–11.5	–9.0	–5.0	–1.8	0.1	0.4
Source: Statistics Austria.

On the output side, there are major differences between individual sectors. In the service sector, which was severely hit by the lockdown, the loosening of restrictions triggered a strong rebound in the second quarter. In the wholesale and retail trade, transportation and storage and accommodation and food service activities (NACE G–I), value added increased by 20.4% in real terms (quarter on quarter, seasonally and working-day adjusted). Although a breakdown by sectors is not available, employment data ³ suggest that growth was almost exclusively powered by accommodation and food service activities (NACE I), which had been hit particularly hard by the lockdown. Construction (NACE F) only increased marginally (+0.3%) in the second quarter following rapid growth in the first quarter (+5.1%), while industry (B–E) even recorded a slight decline in value added (–0.1%). This points to a significant shift in growth drivers in the second quarter.

Table 2: National accounts data for Austria (production-side data published on September 2, 2021)  

	Q2 21	Q1 21	Q4 20	Q3 20	Q2 20	Q1 20	2020	2019	2018	2017
	Change on previous period in %
GDP	+3.6	–0.2	–2.5	+11.0	–10.9	–2.2	–6.3	+1.4	+2.5	+2.5
Gross value added	+4.0	0.0	–2.8	+10.6	–10.5	–2.2	–6.3	+1.4	+2.7	+2.6
Agriculture (NACE A)	+5.1	+2.9	–3.8	–2.3	–0.8	+0.7	–3.0	–1.0	+3.6	+5.6
Industry (NACE B–E)	–0.1	+4.3	+1.8	+11.9	–12.1	–1.1	–6.4	+1.2	+4.6	+4.1
Manufacturing (NACE B–E)	–0.4	+4.5	+1.6	+12.7	–12.9	–1.8	–7.2	+0.8	+5.2	+3.9
Construction (NACE F)	+0.3	+5.1	–0.1	+5.4	–6.9	–2.5	–4.1	+2.8	+1.8	+3.3
Services, total (NACE G–U)	+5.8	–2.0	–4.5	+11.1	–10.7	–2.6	–6.6	+1.4	+2.2	+2.0
Services, private (NACE G–N)	+7.9	–2.9	–5.8	+14.0	–13.3	–2.8	–8.0	+1.7	+2.8	+2.3
Trade, transport/storage, hospitality (NACE G–I)	+20.4	–7.4	–16.3	+29.2	–21.7	–6.9	–15.4	+1.1	+2.0	+1.5
Information and communication (NACE J)	–0.4	+2.9	+1.2	+0.5	–3.4	–1.4	–1.6	+3.8	+9.8	+2.1
Financial and insurance services (NACE K)	+0.8	–2.2	+1.9	+2.3	0.0	+2.6	+4.1	+3.1	+2.9	+5.3
Real estate activities (NACE L)	+1.0	+0.1	–0.2	–0.5	–0.7	+0.9	+1.0	+1.2	+1.1	+1.4
Scientific and technical activities (NACE M–N)	+0.6	+0.0	+5.9	+13.5	–18.4	–0.1	–7.9	+2.1	+3.6	+3.7
Public services (NACE O–U)	+0.9	+0.0	–1.3	+4.4	–3.9	–2.0	–2.9	+0.7	+0.7	+1.4
Public administration (NACE O–Q)	+0.7	+0.8	+0.4	+0.7	–0.6	–0.5	–0.4	+0.7	+0.9	+1.3
Other services (NACE R–U)	+2.6	–6.3	–12.9	+39.3	–26.8	–10.9	–18.3	+0.6	–0.4	+2.1
Source: OeNB.

2 GDP slightly surpassed its pre-crisis levels for the first time in late July

Compared with the same weeks of the previous year, growth rates currently show a strong positive trend (see chart 1, green line) as a result of a pronounced base effect. In week 29, output surpassed the rate recorded in the corresponding week the year before by 4.5%.

3 August 2021 results of the OeNB’s export indicator: export growth remained high in the summer

According to current results of the OeNB’s export indicator ⁵ based on truck mileage data, export growth remained high in June and July at –0.9% and +0.0%, respectively (monthly change, seasonally and working-day adjusted). This translates into annual growth rates of 25.8% or 12.6% (not adjusted). But the meaningfulness of these growth rates is limited due to the deep plunges in the previous year. When compared with the corresponding months of 2019, nominal exports of goods in June and July 2021 grew by 9.4% and 7.9%, respectively (working-day adjusted).

4 Leading indicators at high levels in spite of declining foreign trade

On the other hand, leading indicators for foreign trade show first signs of a possible future downturn. The European Commission’s monthly estimate of order book levels continued to increase in July. Quarterly available estimates of exports dropped in the third quarter, having reached a historical high at 20.7 points in the second quarter, but at 8.7 points, they still remain marginally above the long-term average. By contrast, the export order index declined steeply in July (to 57.4 points after 66.4 points in June), according to Bank Austria, reflecting existing capacity issues in international trade, such as logistic problems, lack of containers and closing of container ports and cargo airports in China, as a result of strict local containment measures due to the ongoing pandemic situation.

5 August 2021: surge in overnight stays by foreign visitors

For August 2021, data on tourist spending based on card payments point to a marked rise of overnight stays by foreign visitors; the OeNB expects a 27% increase compared with August 2020. This would imply that the number of overnight stays in August remained only 2% below the record levels measured in 2019. This increase is attributable above all to the much higher number of German tourists (about +15%) and Dutch tourists (about +50%) compared with the previous year, which compensated for the losses caused by overseas visitors continuing to stay away.

In contrast, the number of overnight stays by domestic tourists declined slightly compared with 2020 (–6%, July: –2%). At the same time, the figures were 16% higher in August 2021 than in 2019, when Austria’s tourism industry reported the highest number of overnight stays on record. In sum, the OeNB expects the number of overnight stays to have been 15% higher in August 2021 than in August 2020 and 2% higher than in the record summer of 2019. The combined result for July and August is a year-on-year increase by 8% compared with the summer of 2020, which corresponds to a decline of 7% against 2019.

6 Economic projections see 4% to 5% output growth in 2022

7 Inflation significantly on the rise since early 2021

Following the lifting of pandemic-related containment measures, Statistics Austria was able to resume the collection of prices for all goods contained in the Austrian HICP basket in July 2021. In early 2021, Statistics Austria had still carried forward 20% of the relevant prices from the previous months, as the corresponding market prices were not available due to shutdowns.

Energy price inflation had climbed to 13.5% by August 2021, well above the rate observed for January 2021 (–5.3%). This increase reflects the surge in crude oil prices in recent months as well as the base effect of the decline in crude oil prices in the corresponding period of 2020. Within the energy price component, transport fuels and heating oil registered a significant uptick in prices, whereas the prices for other energy resources (gas, solid fuels, electricity, thermal energy) increased comparatively moderately. The annual rate of services inflation stood at 2.3% in August 2021 (January 2021: 2.3%). Since January 2021, the annual inflation rate has been accelerating above all for hospitality services, air tickets, sports and recreation services as well as cultural services. At the same time, rental price inflation rate went down markedly (August 2021: 0.4%; January 2021: 5.5%).

The annual rate of inflation for nonenergy industrial goods climbed to 3.0% in August 2021 (January 2021: 1.5%). This increase was driven above all by prices for clothing and footwear, furniture and furnishings as well as other durable consumer goods, such as vehicles, glassware and electrical household appliances. More ­recently, inflation pressures also arose from shifts in the pattern of clothing and footwear clearance sales. In 2020, shops had started to sell off excess inventory in May. Since seasonal clearance sales have been much weaker in 2021 than in 2020, base effects caused inflation to rise in this product segment. With regard to durable consumer goods, the uptick in inflation may reflect the pass-through of high commodity prices to end-user prices.

Food price inflation (including alcohol and tobacco) dropped considerably in early 2021 (January 2021: −0.5%) and amounted to 1.1% in August 2021. In recent months, above all the prices of meat and beverages have been going up markedly, possibly reflecting the reopening of hotels and restaurants in May 2021.

Analyses

How effective were measures introduced in the COVID-19 crisis in supporting household incomes?

Susanne Maidorn ¹⁰ , Lukas Reiss ¹¹

Refereed by: Hans Pitlik, WIFO

We analyze the distributional effects of both, the COVID-19 crisis and the measures introduced to support household incomes, using the microsimulation model developed by the Office of the Fiscal Advisory Council (FISKSIM). In 2020, more than one-third of Austrian households were affected, at least temporarily, by unemployment, short-time work or losses in self-employed income. The fiscal measures to support household incomes clearly cushioned the financial impact of the crisis on households. They proved particularly effective in two ways: First, ­lower-income households benefited more (vertical effectiveness); second, within individual ­income brackets, those households that had experienced higher losses due to the COVID-19 shock benefited more strongly from support measures (horizontal effectiveness). This was achieved mostly by the establishment of the hardship fund and one-off payments to unemployed workers.

JEL classification: H53, D30

Keywords: fiscal stabilization measures, income distribution.

As a result, aggregate self-employed income decreased, more than 1,000,000 people were temporarily put on short-time work, and the number of unemployed averaged more than 400,000 over the year, which implied significant losses in ­employment income. In the aggregate, the compensatory fiscal measures and the automatic stabilizers offset the losses in household income in 2020.

If we adjust for capital income, which is both volatile and very unevenly distributed, the growth of aggregate disposable household income amounted to approximately 3½% in 2020, which roughly corresponds the long-term average (chart 1, blue line). That said, the degree to which households were financially affected ­varies strongly. Moreover, the packages to support household incomes included not only targeted measures like payments from the hardship fund or one-off payments for people on unemployment benefits. For instance, a cut in income tax and an additional one-off family allowance payment (“child bonus”) also benefited households that did not experience income losses.

In this study, we analyze the effectiveness of the implemented measures with respect to the income distribution by looking at both their vertical and their ­horizontal effectiveness. We consider ­measures to be vertically effective if their relative effect in terms of the absolute amount of disposable household income was larger within each quintile than in the wealthier quintiles. Likewise, we consider measures to be horizontally effective if their relative effect within a quintile was larger among households that had ­experienced higher income losses caused by the COVID-19 shock than among households without income losses. ¹²

The extent to which interventions to contain the pandemic restricted economic activity varied sharply across sectors. Therefore, we model the COVID-19 shock to the labor market on a sectoral basis, so that household incomes from economic activity in severly hit sectors suffered higher losses. We follow an approach broadly similar to that used by Baumgartner et al. (2020), who analyze the cyclical, fiscal and distributional effects of the measures adopted during the COVID-19 crisis, arriving at consistent results as regards the associated changes in disposable household incomes. However, while Baumgartner et al. (2020) look primarily at the distribution of support among households ­broken down by the latter’s income levels, we also analyze the distribution among households in relation to actual income losses they experienced. Christl et al. (2021), who also examined the impact of the COVID-19 crisis and countermeasures, find that Austria was mostly successful in avoiding an increase in the risk of poverty ¹³ ; without government measures, this risk would have risen notably. In our study, we take into account a wider range of ­measures, including, in particular, measures implemented to compensate for losses in self-employed income.

In the next section, we describe the fiscal measures we included in our analysis. In section 2, we discuss the methods used in the microsimulation model FISKSIM to adapt household data to the COVID-19 shock and to implement the associated government measures. After that, we analyze the distributional effects of the shock and the measures in the aggregate. The extent to which individual measures ­contributed to the effectiveness of the entire package of measures is shown in ­section 4, and section 5 concludes.

1 Overview of the analyzed fiscal measures

• COVID-19 short-time work: Employees working between 10% and 90% of ­normal hours received minimum pay based on replacement ratios of between 80% and 90% of their ordinary pay. ¹⁴
• Hardship fund (administered by the Austrian Economic Chambers): One-person ­businesses, freelancers and micro businesses that had experienced a decline in sales by at least 50% compared with the same period in 2019 (in up to ten ­one-month assessment periods in 2020) were eligible to apply for grants of up to EUR 2,600. The 2020 assessment periods were between March 16, 2020, and January 15, 2021 (see Federal Ministry of Finance, 2020a).
• AMA fund for farmers: The AMA fund for farmers was set up in a similar way to the hardship fund, with grants amounting to 80% of the difference between the income from agriculture and forestry in 2020 compared to the same period in 2019 (Federal Ministry of Finance, 2020b).
• Bridge fund and COVID-19 fund for artists: These funds respectively provided for grants of up to EUR 14,000 for self-employed artists covered by the social ­insurance system and up to EUR 3,500 for artists that are entitled to unemploy­ment benefits or earn very low incomes (Federal Ministry of Arts, Culture, Civil Service and Sport, 2020a and 2020b).
• One-off payments for people on unemployment benefits: The first payment amounted to EUR 450 per person, the second to up to EUR 450, depending on the ­number of days a person had already been on unemployment benefits (Parliament, 2020).
• Increase of unemployment assistance for the long-term unemployed who have become ineligible for unemployment benefits to the level of regular unemployment benefits.
• Child bonus: one-time payment of EUR 360 per child.
• Increase in the supplement income limit for family allowance and extended entitlement to family allowance and student grants (because of the “neutral” semester).
• Family hardship fund and family crisis fund: payments of up to EUR 3,600 for families affected by short-time work or unemployment after February 2020 or income losses as defined under the hardship fund (Federal Ministry of Labour, Family and Youth, 2020; Arbeiterkammer, 2021).
• Personal income tax cut: reduction of the lowest income tax rate from 25% to 20%.

Short-time work is a special case in this context, given that it is difficult to tell to what extent government funds have benefited employers on the one hand and employees on the other. ¹⁶ We compared the new replacement ratios (see above) with those under the short-time work scheme that had been in force before March 2020 to calculate our main results. Also, in section 4 we use an ­additional scenario to describe the job-saving effect of short-time work.

In chart 2, we show the FISKSIM-simulated costs of the income tax cut as well as the unemployment and family benefit payments and grants from the hardship fund (blue columns) and compare these amounts with actual budgetary costs (red lines). ¹⁷ We see that the simulated values match the actual costs (to the extent that related data are available) very well.

2 Methodology ¹⁸

For our analysis, we therefore adjusted the EU-SILC 2017–2019 data to three scenarios:

We implement the counterfactual (i.e. “no pandemic”) scenario for 2020 on the basis of WIFO’s economic outlook of December 2019 (Glocker, 2020), which projected real economic growth of 1.2% for 2020, by adjusting the weights (Bachleitner and Maidorn, 2019). This implied an increase in the number of ­actively employed and self-employed by 1.1% and 0.4%, respectively. The number of unemployed persons was projected to rise by 1.7%. We also extrapolate earned incomes on the basis of the WIFO outlook. ²⁰ Details on the implementation of this simulation can be found in annex 1 and 2.

The drop in earned income in the wake of the crisis is attributable to three ­factors: a sharp increase in the number of people on short-time work, a big rise in unemployment and a steep fall in self-employed income (to varying degrees across sectors). There was also a marked decline in capital income in 2020 ²¹ , but we do not analyze its distributional effect for the following two reasons: First, household surveys tend to very much understate capital income, which is also very unevenly distributed; both these factors make an analysis much more difficult. Second, stock markets recovered quickly after their nosedive at the beginning of the pandemic. This means that an isolated assessment of the decline in capital income in 2020 would overestimate the pandemic-related financial losses for higher-income households.

3 Aggregate effect of COVID-19-related fiscal measures

Our simulation shows that more than one-third of households in Austria ­experienced income losses due to the COVID-19 shock if the effect of the support measures is not factored in ²³ (left-hand panel of chart 3). The share of households affected by pandemic-related income losses is similar in Albacete et al. (2021; p. 121), who also analyze differences in the extent to which households were financially affected by the COVID-19 shock, which depends, inter alia, on people’s work ­status.

Overall, the COVID-19 shock would have reduced the average household ­income in the bottom quintile by around 2.1% (blue column in the right-hand panel of chart 3) if no fiscal measures had been taken. The relative drop in household income decreases slightly with rising incomes – from 1.9% in the second quintile to 1.6% in the fifth quintile. The calculated reduction in household ­income takes into account automatic stabilizers (unemployment benefits, short-time work pay under pre-pandemic schemes, lower tax liabilities for lower incomes).

Within quintiles, we see large differences: While many self-employed households and households affected by crisis-related unemployment experienced a sharp drop in incomes, there is a large number of households whose incomes were not directly affected by the pandemic (employees not affected by short-time work or COVID-19-related unemployment, pensioners without earned income). In the second to fifth quintiles, 37% to 43% of households were affected by income losses (left-hand panel of chart 3). In the first quintile, by contrast, due to a lower labor participation rate, only a quarter of households experienced income losses; the losses in this category were notably higher, though (chart 4).

Chart 4 shows the distributional effects of the COVID-19 shock and the related measures on households broken down by severity of shock impact. We split the households of each quintile into different groups, i.e. unaffected households that did not experience income losses due to the COVID-19 shock and households ­affected by pandemic-related income losses to different degrees; the latter are split along the median of relative income losses into two – equally large – groups: ­severely affected and less affected households (see also left-hand and middle panel of chart 4). The earned income of severely affected households in the bottom ­quintile dropped, on average, by around 13%, compared with 7% to 8½% in the other quintiles. In the group of less affected households, the relative losses did not vary much across the income distribution, ranging from 1.9% in the bottom ­quintile to 1.3% in the top quintile. At the same time, the incomes of unaffected households increased between 0.4% in the bottom quintile and 1.0% in the top quintile.

Thanks to the comprehensive set of fiscal measures (dark red columns in the right-hand panel of chart 3), the combined effect (“net effect”) of the shock and fiscal measures on household incomes is even positive in the lower quintiles; in the two highest quintiles, incomes decreased somewhat (green line in the right-hand panel of chart 3). Severely affected households in the lower two quintiles were compensated, on average, for about two-thirds of their losses, while in the middle and upper quintiles, average compensation amounted to one-half and one-third, respectively. Hence, the average net effect on severely affected households’ ­incomes was notably more uniform than the effect of the COVID-19 shock, ranging ­between –2.9% in the second quintile and –5.3% in the top quintile.

The impact of the fiscal measures on disposable income across household groups largely corresponds to that identified by Baumgartner et al. (2020). However, the set of measures covered by our analysis also includes the second one-off payment for people on unemployment benefits in December, the family hardship fund and the family crisis fund. As a result, the share of funds paid out to lower-­income households is higher in our analysis, amounting to 26.5% in the bottom tercile, compared with 23.0% in Baumgartner et al. (2020).

4 How did individual instruments contribute to measures’ overall effectiveness?

In the following, we describe the effects of individual instruments, looking at two different forms of effectiveness, i.e. instruments’ impact

• in relation to household income (chart 5): Here we analyze vertical effectiveness, which requires that the relative effect of a measure is higher in each quintile than in the higher quintiles, and
• in relation to income losses caused by the COVID-19 crisis (chart 6): Here we analyze horizontal effectiveness, which requires that the relative effect of a measure within a quintile is larger among severely affected households than among ­unaffected households. ²⁴

The measures’ effectiveness in relation to income losses caused by the COVID-19 shock is expressed by the difference in the effects on severely ­affected households compared to unaffected households (chart 6). For severely affected households, the hardship fund turned out to be the most important measure, next to short-time work and its job-saving effect (see below). In the bottom ­quintile, severely affected households received more transfers than unaffected households: the difference amounted to 6.2% of the former’s household income; 3.4 percentage points were attributable to payments from the hardship fund. The one-off payment for people on unemployment benefits were also targeted at households hit particularly hard by the crisis, but the payment also benefited households affected by ­unemployment not caused by the crisis. Likewise, households affected by the crisis benefited to a larger extent from the child bonus ­because households with children were more likely to experience income losses than households without children (above all, due to pensioner households without children, which hardly lost any income at all). Given that the purpose of the family hardship fund was to compensate people for actual income losses (similar to the hardship fund), its effect was also relatively strong for the lowest two quintiles.

That said, we see the high effectiveness of the set of fiscal measures only if we compare its relative effect among the severely affected, less affected and unaffected household groups; we do not see it, if we compare the net effect of the COVID-19 shock and the measures among these groups. In particular, we find that the ­negative effect of the COVID-19 shock was larger than the positive effect of the measures among severely affected households in the quintile averages (chart 4).

We paid particular attention to the COVID-19 short-time work scheme, which was much more employer friendly compared to similar pre-pandemic schemes so as to provide stronger incentives for companies to preserve jobs (in particular, ­employers were ­exempt from paying social security contributions, and the scheme also provided for more flexibility in reducing ­working hours). In some cases, the minimum pay an employee is entitled to under the COVID-19 short-time work scheme may be lower than under previous schemes (especially if both the regular pay and the number of hours worked are relatively high), which implies that the effect of the new replacement rates was even slightly negative for some (above all in the fourth quintile, see charts 5 and 6). Still, the job-saving effect of the COVID-19 short-time work scheme was very high for all household income groups. An additional shock scenario ­illustrates this effect: it assumes that if the scheme had not been adjusted as a response to the COVID-19 shock, use of short-time work would have been lower by half, and unemployment would have been correspondingly higher. The shaded blue columns illustrate that in this case, the estimated ­effect of the fiscal measures would have been ½ to 1 percentage point higher (chart 5) ²⁶ and that average household incomes would have been ½ to 1 percentage point lower. This effect is higher still if we look at differences in income between households severely affected by the crisis and unaffected households, amounting to 2½ to 3 percentage points (chart 6; these effects are not shown in charts 3 and 4). Table 1 offers an overview of the vertical and horizontal effectiveness of the measures under analysis.

Table 1: How did individual measures affect horizontal and vertical effectiveness?  

	Vertical ­effectiveness	Horizontal ­effectiveness
Income tax cut	–	~
One-off unemployment payment	++	+
Higher unemployment assistance	++	~
Child bonus/family allowance	++	+
Hardship fund	+	++
Family hardship fund	++	++
Replacement rate of short-time work	+	+
Use of short-time work scheme	~	++
Source: Office of the Fiscal Advisory Council, OeNB.
Note: Relative to household income, measures benefit lower-income households and/or households more ­severely affected (in financial terms) by the COVID-19 shock much more (++), more (+), more or less equally (~), less (–) than higher-income households and/or households that have not been ­affected financially by the COVID-19 shock.Meaning of “benefit much more (++)” in terms of vertical equity: in percentage terms, the 1st quintile benefits at least twice as much as the overall average, and the 2nd quintile by at least 50% more than the overall average. Meaning of “benefit much more (++)” in terms of horizontal equity: at least in the first four ­quintiles, measures benefit households severely affected by the COVID-19 shock at least twice as much as the quintile average.

5 Conclusions

We show that especially the measures aimed to compensate for actual COVID-19-related losses were horizontally effective; these measures included the hardship fund and the family hardship fund. This also applies indirectly to the use of short-time work arrangements, which helped avoid higher income losses caused by ­unemployment. Vertical effectiveness was best achieved through measures aimed to support especially lower-income households (e.g. family hardship fund) or funds paid only to households affected by unemployment, which are more often found in the lower quintiles.

At the same time, other measures aimed to increase overall consumer demand instead of providing support specifically to those affected by the crisis; these ­measures included the reduction of the lowest income tax rate, which was put into force earlier than originally planned, and the child bonus. Interestingly, the child bonus also achieved relatively good vertical and horizontal effectiveness (see also table 1) because it accounted for a larger part of household income in the lower quintiles and because families with children were affected by the crisis more ­severely due to their higher share of earned icome from labor market participation compared to e.g. pensioner households. The reduction of the lowest income tax rate was the only measure we found to be neither vertically nor horizontally effective.

References

Albacete, N., P. Fessler, F. Kalleitner and P. Lindner. 2021. How has COVID-19 affected the financial situation of households in Austria? In: Monetary Policy and the Economy Q4/20–Q1/21. OeNB. 111–130.

AMS (Public Employment Service Austria). 2020. Bundesrichtlinie Kurzarbeitsbeihilfe (KUA-COVID-19). BGS/AMF/0702/9931/2020.

AMS (Public Employment Service Austria). 2021. Kurzarbeit sichert nachhaltig Arbeits­plätze und Know-how. Special labor market analysis. January 2021.

Arbeiterkammer. 2021. AK Gerechtigkeitscheck der Regierungsarbeit im ersten Corona Jahr. Vienna.

Bachleitner, A. and S. Maidorn. 2019. Das Mikrosimulationsmodell des Büros des Fiskalrates (FISKSIM). Interaktionseffekte ausgewählter Transferleistungen in Österreich. Vienna.

Baumgartner, J., M. Fink, C. Moreau, S. Rocha-Akis, S. Lappöhn, K. Plank, A. Schnabl and K. Weyerstrass. 2020. Wirkung der wirtschaftspolitischen Maßnahmen zur Abfederung der COVID-19-Krise. Mikro- und makroökonomische Analysen zur konjunkturellen, fiskalischen und verteilungspolitischen Wirkung. WIFO.

Christl, M., S. De Poli, D. Kucsera and H. Lorenz. 2021. COVID-19 and (gender) inequality in income: the impact of discretionary policy measures in Austria. JRC Working Papers on Taxation and Structural Reforms 05/21.

Federal Ministry of Arts, Culture, Civil Service and Sport. 2020a. Richtlinie für die Gewährung von Überbrückungsfinanzierungen im Rahmen des Bundesgesetzes über die ­Errichtung eines Fonds für eine Überbrückungsfinanzierung für selbständige Künstlerinnen und Künstler.

Federal Ministry of Arts, Culture, Civil Service and Sport. 2020b. Richtlinien für die Gewährung von nicht rückzahlbaren Beihilfen aus dem COVID-19-Fonds gemäß § 25b iVm § 25c Abs. 3a Künstler-Sozialversicherungsfondsgesetz.

Federal Ministry of Finance. 2020a. Richtlinie zur Regelung der Auszahlungsphase 2 im Rahmen des Härtefallfonds für Ein-Personen-Unternehmen, Freie Dienstnehmer und Kleinstunternehmen, BMF - II/10.

Federal Ministry of Finance. 2020b. Richtlinie gemäß § 1 Abs. 4 Härtefallfondsgesetz für ­Einkommensausfälle bei land- und forstwirtschaftlichen Betrieben sowie Privatzimmer­vermietungen, BMF - II/9.

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Figari, F., A. Paulus and H. Sutherland. 2014. Microsimulation and Policy Analysis, ISER Working Paper Series.

Glocker, C. 2020. Schwäche der Weltwirtschaft dämpft Konjunktur in Österreich. Prognose für 2020 und 2021. WIFO-Monatsberichte 1/2020.

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Annex 1: The simulation of the COVID-19 shock in detail

The given target value of the number of people on short-time work in each ­sector is obtained by randomly sampling payroll employees in the SILC data on the basis of their information about their employer’s NACE sector ²⁹ . Apart from that, no other correlation between the probability of short-time work and, for instance, an employee’s pay or position in the company is assumed, as no such correlation can be derived from microcensus data. The average duration of short-time work is calculated on the basis of a breakdown of AMS payments by economic activity, the number of persons on short-time work, and short-time work subsidy per person calculated on the basis of SILC data and taking into account the reduction of ­working hours. This yields an average duration between around two months (e.g. in manufacturing) and around four months (e.g. in accommodation and food services).

Under the counterfactual scenario (without the COVID-19 pandemic), we ­calculated, on the basis of the WIFO economic outlook of December 2019, the number of people on unemployment benefits and unemployment assistance to have averaged around 148,000 and around 155,000, respectively, in 2020. According to AMS data, in 2020, an average of around 202,000 persons received unemployment benefits and around 190,000 persons received unemployment assistance; compared with the counterfactual scenario, these numbers are around 54,000 and 35,000, respectively, higher. The number of additional persons on unemployment benefits for each sector was generated on the basis of the monthly unemployment statistics by sector from the stock of counterfactual employment taking into account ­information on the NACE sector of the relevant companies; the probability of ­unemployment was modeled contingent on gross incomes. The number of additional persons on unemployment assistance was generated from the counterfactual stock of persons on unemployment benefits. ³⁰

A shorter duration of unemployment is assumed for some of the additional ­people on unemployment benefits. Their number and the duration of unemployment was derived from the monthly stock of unemployed by economic sectors, in particular from the drop in unemployment seen in the months May to August compared to the high recorded in April 2020. We thus obtain an average duration of approximately three months with only minor sector-specific fluctuations. For all other benefits recipients, the duration of unemployment was assumed – on the basis of SILC data – to be four months. ³¹

The COVID-19 shock scenario without fiscal measures uses the tax and transfer regime (including short-time work scheme) that had been in place until March 2020. Under the phase II COVID-19 short-time work scheme, which entered into force in June 2020, support was higher the lower beneficiaries’ hourly pay and number of hours worked were. This, in turn, may imply less support in certain cases under the new scheme. At the same time, the new scheme was more attractive for employers: The public purse covers employer and employee social security ­contributions and the minimum pay rule means that employers are required to pay only the replacement rate and not the full hourly wage for actual hours worked. We can therefore assume that the COVID-19 short-time work scheme contributed more to saving jobs than previous schemes. Hence, the COVID-19 shock scenario without fiscal measures is calculated in the following two variants: in the first ­variant, all persons on COVID-19 short-time work are assumed to be in the pre-pandemic short-time work scheme; in the second variant, half of this group is unemployed. The latter implies an additional 120,000 jobless on average over the year.

The decline in self-employed income was derived from quarterly national ­accounts data broken down by economic activity. The subsidies (which, like the data for all individual sectors, are only part of not yet published annual national accounts data) were calculated on the basis of data on the compensation for lost sales and short-time work by sector. The change in self-employed income under the 2020 shock scenario compared with 2019 is assumed to be a normal distribution with a mean ³² corresponding to the adjusted change in a sector’s net operating ­surplus ³³ .

Annex 2: The simulation of the fiscal measures in detail

For payouts from the bridge fund and the COVID-19 fund for artists, FISKSIM also assumes that those self-employed that experienced the highest losses in income apply for support. For the bridge fund, only payouts to persons whose self-employed activity is their main economic activity are taken into account, whereas for the COVID-19 fund, only payouts to persons on very low income or unemployment benefits or assistance are included.

Corporate equity finance in Austria – impediments and possible improvements

Peter Breyer, Eleonora Endlich, Dieter Huber, Doris Oswald, Christoph Prenner, Lukas Reiss, Martin Schneider, Walter Waschiczek ³⁷

This study examines the state of play of equity financing in Austria and highlights challenges Austrian companies face in raising equity capital. The equity ratios of Austrian companies had been improving steadily before the onset of the COVID-19 pandemic, which has been weighing considerably on corporate equity levels. The decrease of equity levels would, however, be about twice as high in the absence of the support measures taken to alleviate the economic effects of the pandemic. The bulk of Austrian companies’ equity is sourced from the rest of the world, while the domestic financial sector plays only a minor role in providing equity funding. Impediments to raising capital externally include business owners’ reluctance to share control with external investors, information deficits and data gaps as well as differences in the tax ­treatment of debt and equity (“debt bias”). Equity supply is limited because investors lack ­information on the economic situation of capital-seeking companies and because investments in unlisted companies are less liquid. Together with representatives of national and inter­national institutions and market participants, we identified ways to strengthen the equity base of Austrian companies. Cases in point are providing both tax incentives and intermediation support for equity finance and establishing public-private partnerships.

JEL classification: E61, G1, G2, G32

Keywords: corporate finance, equity, institutional investors

In this study, we give an overview of the equity structure of Austrian companies, or nonfinancial corporations to be conceptually precise. We highlight challenges in raising equity capital and present ways to increase equity finance. Our goal is to provide more comprehensive data and a better understanding of the underlying mechanisms, explain the issues in more detail and share best practices from other countries.

The study is structured as follows: In section 1, we present data on the equity ratios of Austrian companies before and during the COVID-19 pandemic. In ­section 2, we look at equity ownership structures to answer the question: who is investing in Austrian companies? Section 3 discusses the concept of the funding escalator and frictions between capital supply and demand. In section 4, we outline possible avenues for strengthening corporate equity in Austria and present inter­national best practices. Section 5 summarizes.

1 Understanding the facts: equity ratios of Austrian companies

1.1 Pre-crisis equity ratios were improving but bottom quartile ratios remained weak in an international peer comparison

Breaking down corporate equity structures by business sectors enables us to identify vulnerable areas in Austria (chart 2). Using weighted averages for 2018, we see that the corporate equity ratios measured for Austria were broadly aligned with the ratios measured for other countries in most business sectors (other than the hospitality sector). However, Austrian companies performing in the bottom quartile tended to be negative outliers. In other words, Austrian companies in the bottom quartile face heightened insolvency risk from debt overhang. Overall, only about 10% of all insolvencies in Austria result from debt overhang problems, whereas 90% of all insolvencies arise from liquidity issues. The propensity for ­liquidity problems is driven above all by small companies, which account for 89% of all companies covered by the BACH database. Of all size classes, the best equity capital ratios are in all countries attributable to medium-sized companies (with an annual sales volume of between EUR 10 million and EUR 50 million) and large companies (with an annual sales volume of more than EUR 50 million). This holds true in particular for companies in the bottom quartile. Among the companies in the bottom quartile, Austrian medium-sized companies are closer to the lower end while large Austrian companies tend to be aligned with the average of the other countries under review.

Apart from the BACH data, which are aggregated balance sheet data, we also draw on corporate data from the Sabina database, which provide for a more granular view of the corporate equity structure in Austria. ⁴⁰ Based on the Sabina data, we see that 17.4% of all Austrian companies had a negative equity balance in 2018. The share of companies with a negative equity balance was particularly high among companies in the hospitality industry (32.1%) and companies providing arts, entertainment, recreation and other services (28.4%).

Table 1: Equity ratio by sectors (Sabina data for 2018)  

	Equity ratio by quartiles				Share of companies with an equity ratio of		Share of firms with	Number of ­companies	Average assets (EUR thousand)
	Average	Bottom quartile	Median	Third quartile	< –30%	< 0	Cash and bank < 0
Total	39.9	8.7	37.7	71.1	9.9	17.4	2.5	129,239	5,506
Agriculture (A)	55.5	6.1	29.5	63.3	7.6	16.2	0.1	956	2,549
Mining (B)	50.3	16.4	42.1	70.0	10.1	14.4	35.0	303	20,774
Manufacturing (C)	45.9	15.1	39.2	66.5	8.8	14.0	0.1	10,981	14,402
Energy supply (D)	36.1	2.7	18.8	50.5	6.8	20.9	0.2	1,527	33,016
Water supply, waste management (E)	32.1	16.7	40.5	67.6	6.1	11.6	28.0	621	7,585
Construction (F)	31.4	10.8	36.1	64.9	6.8	14.2	0.1	15,648	2,426
Trade (G)	42.7	11.1	38.4	69.5	12.0	17.8	0.1	27,337	4,067
Transport and storage (H)	32.7	6.3	29.2	58.4	10.6	19.6	0.2	4,672	10,631
Accomodation and food service activities (I)	26.3	–14.9	19.2	51.5	20.4	32.1	0.2	8,782	1,984
Information and communication (J)	44.6	14.2	49.3	77.3	12.9	17.6	0.1	7,877	2,815
Real estate activities (L)	38.8	2.3	24.6	73.7	5.8	19.4	13.7	21,261	7,674
Scientific and technical activities (M, excl. head office activities)	49.5	25.9	58.3	83.9	6.9	10.4	0.1	18,427	1,537
Support service activities (N)	27.5	10.7	36.3	67.0	10.3	16.3	0.2	5,505	5,059
Education (P), health and social ­actitivies (Q)	30.9	9.4	37.4	70.6	12.1	18.2	0.1	2,287	1,805
Arts, entertainment, recreation (R), other services (S)	28.8	–8.2	29.1	65.3	19.4	28.4	0.2	3,055	2,410
Source: Sabina database, OeNB calculations.

1.2 OeNB insolvency model reveals substantial impact of pandemic support measures on corporate equity levels

The results show that the pandemic-related crisis had a major impact on ­corporate equity in Austria. In the absence of support measures and when we ­factor out the effects of COVID-19, the equity level of Austrian companies would have been EUR 25 billion lower in 2020. The support measures diminish the ­decline in equity to EUR 17 billion, thus improving equity availability by EUR 8 billion in 2020 (chart 3). Equity losses until 2022 add up to EUR 47 billion (without support measures) or EUR 34 billion (with support measures).

However, note the caveat that these results must not be interpreted as equity finance forecasts, as the insolvency model simulations are conditional on the ­validity of numerous restrictive assumptions, and as they contain only the losses resulting from the projected decline in sales. Moreover, the simulations do not reflect the (substantial amount of) capital transfers from the household sector and from nonresidents observed in 2020, which means that the decline is overstated. The estimated pandemic-­related decline in equity is also likely to constitute an upper bound as our insolvency model does not factor in any ­corporate investments. ⁴³ Gross fixed capital formation by companies contracted by 3.9% in 2020 in view of lost sales. In other words, lower investment levels cushioned losses in sales to some extent, causing the impact of the COVID-19 pandemic on capital ratios to be smaller in actual fact than implied by the model.

According to the OeNB’s financial accounts data, corporate equity levels ­contracted by EUR 5.5 billion in 2020. While this figure provides a benchmark, it cannot be used to cross-check the simulation results because of underlying conceptual differences. The insolvency model results are based on simulated monthly balance sheet data. The financial/national accounts framework, by contrast, uses a point-in-time approach to calculate equity levels. Moreover, the two frameworks differ with regard to the coverage of companies. Last but not least, the insolvency model maps the simulated capital losses against a counterfactual scenario without the pandemic, whereas the financial accounts data reflect annual changes.

2 Corporate equity ownership in Austria

According to financial accounts data, the amount of equity held by Austrian nonfinancial corporations totaled EUR 353 billion at the end of 2020 (table 2). ⁴⁴ Stocks accounted for about 30% of this amount (quoted shares: 20%, unquoted shares: 10%). The by far bigger part, namely 70%, was attributable to other ­equity. Other equity refers to equity held in companies that have not been set up as stock corporations. ⁴⁵

2.1 Equity ownership structures in Austria at the end of 2020

Table 2: Corporate equity and debt ownership in Austria  

	MFIs	Institutional investors	Other ­financial ­corporations incl. holdings and SPEs	Private ­foundations	Government sector	Households and ­nonprofit ­institutions serving households	Rest of the world	All sectors
	Assets in EUR million (end-2020)
Quoted shares	466	3,271	735	4,105	20,160	9,691	32,809	71,237
Unquoted shares	1,016	453	1,850	1,166	14,937	1,476	14,209	35,108
Other equity	4,475	2,145	10,648	35,409	14,262	72,864	106,893	246,695
Total equity	5,957	5,869	13,232	40,680	49,359	84,031	153,911	353,039
Total debt	179,597	6,249	5,887	294	25,281	15,383	112,410	345,100
Debt and equity	185,553	12,118	19,119	40,974	74,640	99,414	266,321	698,139
	Share of individual sectors in corporate equity in %
Quoted shares	0.7	4.6	1.0	5.8	28.3	13.6	46.1	100.0
Unquoted shares	2.9	1.3	5.3	3.3	42.5	4.2	40.5	100.0
Other equity	1.8	0.9	4.3	14.4	5.8	29.5	43.3	100.0
Total equity	1.7	1.7	3.7	11.5	14.0	23.8	43.6	100.0
Total financial assets of individual sectors (EUR million)	1,178,334	347,777	134,193	55,465	301,092	779,071	847,298	3,643,228
of which: corporate equity (%)	0.5	1.7	9.9	73.3	16.4	10.8	18.2	9.7
Source: OeNB (financial accounts).
Note: Based on consolidated figures = capital of nonfinancial corporations minus (asset-side) debt instruments held by the nonfinancial corporations sector. MFIs (monetary financial ­institutions) = the OeNB, credit institutions and money market funds; SPEs = special purpose entities.

The (consolidated) capital structure of Austrian companies has remained broadly unchanged since 2006 (the first year for which the respective data are available; chart 4). The share of capital sourced from the rest of the world hovered around 45% in the period under review. At the end of 2020, this share was about 2 percentage points below the share measured for 2006. The MFI share of corporate equity dropped from 4.8% to 1.7%. The ­arising gap was filled by households (whose share of corporate equity went up by 3.6 percentage points between 2006 and 2020) and other financial corporations (plus 3 percentage points, including private foundations). Between 2014 and 2020, which is the subperiod for which data on private foundations are available ­separately, the share of private foundations remained broadly stable.

In order to assess potential options to increase equity finance in Austria, we also need to understand the role corporate equity plays as a source of financial ­investment for individual economic sectors. For most sectors, its relevance is ­comparatively low (table 2). The only two exceptions are private foundations, which had invested close to three-quarters of their financial assets into Austrian corporate equity at the analysis date, and to some extent also households, with a corresponding share of close to 11%. In contrast, institutional investors had put only 1.7% of their financial assets into corporate equity at the end of 2020, and banks only 0.5%. This compares with a share of slightly more than 18% of Austrian corporate equity sourced from nonresident financial investors.

2.2 On the role of institutional investors

The limited role of institutional investors in providing corporate equity in Austria is in no small part due to the structure of Austria’s pension insurance ­system. The pool of assets that is available for investment in capital markets is much larger in countries with funded pension systems than in countries with pay-as-you-go pension systems (like Austria). Furthermore, the asset allocation of institutional investors may be affected by the low degree of market capitalization and ­liquidity that characterizes the Austrian stock market. Austria’s stock market is comparatively small and dominated by small-cap stocks and little free-float owner­ship. In the MSCI World Index, for instance, Austrian stocks carry a weight of less than 0.1%. In this vein, the small share of investment in Austrian stocks is also a reflection of the prudence principle guiding insurance companies and ­pension funds in investing the assets entrusted to them. Last but not least, the comparatively small volumes traded on the Austrian stock market also result in low levels of liquidity. In the absence of adequate liquidity, especially larger ­institutional ­investors will not be able to acquire the volumes required for their portfolios in a timely manner.

Table 3: Quoted shares held by institutional investors  

	Held by
	Mutual funds	Insurance ­companies	Pension funds1	Total
	EUR million (end-2020)
Total	34,325	1,156	0	35,481
Domestic issuers	3,336	1,012	0	4,348
Nonfinancial corporations	2,554	717	0	3,271
Other domestic sectors	782	295	0	1,077
Foreign issuers	30,989	144	0	31,133
	% of institutional investors’ total assets
Total	17.5	0.9	0.0	10.2
Thereof: nonfinancial corporations	1.3	0.6	0.0	0.9
Total assets	196,089	124,236	27,451	347,776
Source: OeNB (financial accounts).
1 Typically investing in mutual fund shares, pension funds hold shares indirectly.

3 Corporate funding escalator and frictions between equity supply and demand

3.1 Equity sourcing in an international comparison

Compared with other countries, Austrian businesses make only limited recourse to the range of equity financing instruments available for the various stages of the business life cycle; they tend to rely on bank loans instead. This holds true for both venture capital financing, which is geared to start-ups and new businesses in the early stages of expansion, and the option to tap the stock market by issuing shares, which is an instrument of choice for mature businesses (chart 5).

Venture capital investment in Austria was equivalent to 0.02% of GDP in 2019 according to OECD data. This is only slightly more than one-third of the euro area average and the measure for Germany. Given the relatively low share of equity in the financial assets held by the nonfinancial sectors – and the even smaller share in the financial assets of the financial sectors – the scarcity of risk capital financing in Austria is unlikely to be due to a lack of funds. Likewise, it is unlikely to result from a lack of subsidy options, since many support mechanisms are in place and many more have been made available in the past decade.

Austria’s relative position in the euro area is not that much different when it comes to quoted shares. According to data derived from the ECB’s Statistical Data Warehouse, the market value of shares issued by Austrian nonfinancial corporations at domestic and foreign stock exchanges was equivalent to 21.1% of GDP at the end of 2020. This was less than half of the euro area average and of the German equivalent.

3.2 Potential frictions between equity supply and demand in Austria

3.2.1 Background

From an investor’s supply-side viewpoint, ⁵¹ several issues are important when providing capital apart from yield targets, namely factors like taxation, the investment horizon and exit options but also factors that go beyond the traditional ­investment focus, such as environmental, social and governance (ESG) criteria. Yield targets may relate to both the current yield and the yield investors can realize when selling their equity stake in a company.

From the equity demand viewpoint, it is above all the following considerations that matter: asset value at issuance (balance sheet view vs. economic view of capital), purpose of equity financing (raise additional capital, fill liquidity gaps, etc.), repurchase privileges, governance, disclosure requirements and possible drag-along rights and obligations of existing and new shareholders.

In a stocktaking exercise for identifying challenges for Austrian businesses in raising equity finance and inviting a debate on possible solutions, we conducted a structured OeNB survey among the following relevant stakeholders: the Austrian Economic Chambers (WKO), Wiener Börse, Austria Wirtschaftsservice Gesell­schaft mbH (aws ⁵² ), Austrian Private Equity and Venture Capital Organisation (AVCO) and AustrianStartups. In addition, OeNB officials met up with representatives of international institutional investors (BlackRock, Allianz Capital Partners and International Finance Corporation) as well as major Austrian banks. Summing up, we found broad agreement among these stakeholders with a view to the ­existing impediments to raising capital. The evaluation highlighted above all the following aspects: (1) difficulties of business start-ups in raising adequate financing in growth stages, (2) tax discrimination between debt and equity, and (3) a lack of financial knowledge.

In the following, we outline the frictions between capital supply and demand in greater detail.

3.2.2 Impediments to demand for equity

Impediments to raising capital externally that were brought up again and again include:

• reluctance among business owners to step aside and allow for significant external control;
• information deficits among business owners with regard to their options for ­raising external capital and how these solutions might work;
• data gaps arising from accounting and internal reporting deficiencies at SMEs, as a result of which the information expectations of external investors cannot be met in a timely manner;
• different tax treatment of debt and equity;
• availability of alternatives such as trade credits, subordinated loans and favorable bank lending.

3.2.3 Impediments to equity supply

3.2.4 What are the regulatory requirements for nonbank financial intermediaries investing in risk capital/equity instruments?

With regard to the role pension funds may play in increasing equity financing, it should be noted that the second pillar of Austria’s pension system is comparatively small. Moreover, the Austrian pension funds invest only limited amounts in shares and tend to invest in foreign rather than domestic shares. This, in turn, is in no small part due to the comparatively limited market capitalization and liquidity of the Austrian stock market. As long as this is the case, any effort to strengthen the role of pension funds is likely to benefit corporate equity financing in Austria only to a relatively small extent. Moreover, the asset allocation rules for pension funds ought to be changed only with a view to enhancing retirement provision.

3.2.5 Regulatory requirements for the financial sector: banks must back investments in nonfinancial companies with own funds

At present, the IRB approach is being applied by just five Austrian banks, using average risk weights ranging from 190% to 370% for equity holdings. All other Austrian banks have adopted the standardized approach, typically using a risk weight of 100% (Article 133 of the Capital Requirements Regulation – CRR). ­Under this approach, a higher risk weight, namely 150%, must be assigned to ­investments in venture capital firms and investments in private equity (Article 128 CRR, exposures associated with particularly high risks). Other risk weights apply for exposures to financial companies, exposures in the form of units or shares in collective investment undertakings or if public sector guarantees apply. Moreover, under the supervisory review and evaluation process, banking supervisors may require banks to hold additional capital (“Pillar 2”) for risks arising from equity holdings deemed not covered or insufficiently covered by the aforementioned ­minimum capital requirements (“Pillar 1”).

The final Basel III framework, which is scheduled to apply from January 1, 2023, onward, will change the risk weighting of equity holdings. Specifically, ­Basel III provides for the migration of equity holdings to the standardized approach; the IRB approach will no longer be permitted. Due to concerns about a feedback loop between financial institutions and the real economy and to account for the higher risk of loss of equity, the risk weight applicable under the standardized approach for credit risk will be increased from currently 100% to 250%. Speculative ­unlisted equity exposures will receive a higher risk weight of 400% under the final Basel III framework. However, the applicable risk weights will depend on the ­specific implementation of the Basel III reforms in the EU.

4 Possible measures to increase corporate equity ownership in Austria

A number of proposals put forth included providing better tax incentives for investing in risk and equity capital. A suggestion brought up repeatedly was to put an end to the tax bias toward debt by allowing fictitious interest on equity to be deductible (for a discussion of this proposal, see box 1). Another idea that was ­proposed repeatedly was an equity investment allowance for early-stage investments (in the amount of about 50% of the capital invested). Another proposal was to widen the time span for which losses arising from equity holdings may be ­carried forward or anticipated (e.g. three years in either direction). Last but not least, it was also suggested to re-introduce a one-year holding or speculation period during which securities investment gains should not be subject to the withholding tax on investment income.

Another possible way to go would be one or more banks stepping forward, ­issuing private equity fund shares or supporting or sponsoring SME funds. The UK Business Growth Fund, launched already in 2011, is a case in point (see box 2). Another option to step up the provision of equity might be to introduce new types of collective investment vehicles: SICAVs (Société d’investissement à capital variable) or SICAFs (Société d’investissement à capital fixe). They would invest in SMEs or start-ups of all shapes and forms. Finally, as also mentioned repeatedly, institutionalizing and expanding the COVID-19 start-up relief fund launched by aws (see footnote 16) should also make a difference.

In the interest of addressing market imperfections, equity finance-promoting funds as discussed above might also be launched as private-public partnerships, geared at supporting Austrian SMEs in predefined sectors, for instance tech ­companies. This role could either be taken on by new entities or by vehicles that exist already at the general and regional government levels, such as Österreichische Beteiligungs AG (ÖBAG, managing companies partially or fully owned by the ­Republic of Austria) or regional government holding companies. Another option would be to expand existing support schemes, like tech catalyst funding provided by aws. Last but not least, one option might also be the creation of silent partnerships by converting publicly guaranteed loans into equity.

5 Summary

According to the OeNB’s insolvency model, the crisis triggered by the COVID-19 pandemic has had a marked impact on corporate equity levels in Austria. Reflecting all support measures known at the time of writing, the insolvency model implies that capital ratios are likely to drop by an average of 6.2 percentage points until 2022. In the absence of the support measures, the decline would be even twice as high, i.e. 12.4 percentage points.

Raising corporate equity is subject to numerous impediments in Austria, on both the supply and demand side. Supply-side impediments include, among other factors, information deficits, deal size issues, low market liquidity, legal and regulatory framework conditions. Demand-side impediments include concerns among owners about losing control, information deficits and data deficiencies or tax ­discrimination.

Discussions with relevant experts and market participants highlighted a number of options to strengthen equity finance. Suggestions that were made repeatedly include creating tax incentives, strengthening intermediation support for equity finance and building public-private partnerships. Beyond Austria, we find a number of examples for how to ensure better access to equity finance for small and ­medium-sized enterprises with public sector initiatives. In this paper, we highlight above all the UK Business Growth Fund and the equity finance support program adopted more recently in France.

References

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The impact of climate change on monetary policy

Andreas Breitenfellner, Wolfgang Pointner ⁶¹

Refereed by: Francesco Drudi, ECB

The challenges of climate change will affect all areas of economic policy, including monetary policy. Rising temperatures, extreme weather events and the political, social and technological responses to climate change may have significant effects on prices, output, productivity or credit markets. Central banks need to reflect these effects in their assessment of risks to price stability, their projections of economic developments and their analyses of financial markets. The mandate of the Eurosystem defines price stability as the primary objective of monetary policy, but it also mentions the support of general EU economic policies, including those aiming at environmental protection. In this contribution, we describe the implications of climate change for price stability, for the future conduct of monetary policy and for central banks’ ­balance sheets. While monetary policy may play a role among the possible economic policy reactions to climate change, we contrast this role with more effective policy responses. ­Monetary policy has several instruments at its disposal: changes in the collateral framework, asset purchases and disclosure of climate-related information. Monetary policy implementation is subject to operational constraints, e.g. the principle of market neutrality, which need, however, to be balanced against central bank objectives and must take market inefficiencies into account. Our considerations square well with the ECB’s recently presented action plan to ­include climate change considerations in its monetary policy strategy.

JEL classification: E52, Q54

Keywords: Climate change, carbon transition, monetary policy, central banks, Eurosystem

This paper presents the possible consequences of climate change for monetary policy in general and for the euro area in particular as well as its effects on the ­Eurosystem’s monetary policy objectives and instruments and its future policy space. We will only deal with financial stability aspects of climate change if they affect monetary policy transmission; climate-related financial stability risks have been addressed in previous OeNB publications (e.g. Pointner and Ritzberger-­Grünwald, 2019). However, we will try to assess the scope for action central banks may take in coordination with other policymakers, who bear the principal responsibility for tackling climate change and its consequences. This question is of ­particular importance for the Eurosystem, which has a clear mandate to maintain price stability in the euro area, but is also obliged to support the general economic policies in the European Union without prejudice to this primary objective. In this respect, the Governing Council of the ECB recently announced an action plan, including a road map, to further incorporate climate change considerations into its policy framework (ECB, 2021).

Some effects of climate change might even reduce central banks’ policy space as climate change impacts the natural rate of interest by reducing productivity and driving up savings, although countervailing effects that are related to technological progress spurred by transition polices must be taken into account. Rising uncertainty about future economic outcomes makes it more difficult for monetary policy­makers to identify temporary and structural changes in the economy.

This article is structured as follows: Section 1 explains why climate change and its economic consequences are a concern for central banks and how the Euro­system’s mandate addresses environmental issues. In section 2, we discuss ­economic policy options available to tackle climate change and identify the appropriate role monetary policy might play in this context. Section 3 briefly addresses the risk management of climate-related financial risks by central banks and financial intermediaries. Section 4 presents some monetary policy instruments that could be used to tackle climate change and section 5 concludes.

1 The relevance of climate change for central banks

The transition to a climate-neutral economy will most likely affect the price of energy and transport and have indirect effects on the prices of other goods. ­Central banks with an inflation target will closely monitor developments like the introduction of a carbon tax and integrate them into their analyses of inflation ­dynamics. Climate change and the side effects of climate policies could also disrupt financial markets and thus disturb the transmission channel of monetary policy, which relies on functioning bond markets and banks’ ability to pass on monetary policy decisions to the real economy.

Finally, central banks hold assets for different purposes (e.g. reserve management, collateral, nonstandard monetary policy measures) and these assets are prone to revaluation due to climate change or climate policies; therefore, central banks should include an assessment of climate change risks in their own risk ­management.

The consequences of climate change might alter the structural parameters in central banks’ economic models. Most central banks rely on macroeconomic ­models which incorporate the long-term relations between demand, supply and prices. Climate change and the reactions of policymakers and markets to global warming can alter the supply side of an economy, and shifts in consumers’ preferences can cause secular changes to the deep parameters, such as intertemporal preferences or risk aversion, on which these macroeconomic models are built (as can other secular trends like demographic changes). Currently, not many central banks integrate climate change in their economic models. Models used by climate economists, such as integrated assessment models (IAMs), often lack a representation of monetary transmissions channels, whereas macroeconomic models do not incorporate economic damage resulting from climate change so far.

The radical uncertainty triggered by climate change might also alter the ­economic modeling framework. Traditionally, macroeconomic models employed by central banks assume a maximization rule applied by social planners, firms or households that strive to maximize the expected value of their future output, ­profits or utility while being subject to certain constraints. Krogstrup and Oman (2019) emphasize that climate change rises uncertainty about the expected ­outcomes of economic activities to new levels where the probabilities for ­catastrophic events become nonnegligible. Such catastrophic and often irreversible events include the thawing of permafrost, which could release huge amounts of greenhouse gases (GHGs) or cause ocean streams to change course. Bearing this in mind, policymakers dealing with climate change should adopt a risk management approach inspired by value-at-risk (VaR) models, which means maximizing future outcomes under the constraint that the risk of catastrophic and irreversible climate change remains below an agreed percentile. Broeders and Schlooz (2021) discuss the effects of climate change as a driver of fundamental uncertainty on central bank policy and propose to apply the precautionary principle to cope with ­potentially irreversible outcomes that cannot be estimated ex ante with meaningful precision. The precautionary principle states that under radical uncertainty, ­additional mitigating policies are justified to lower the likelihood of, and the ­damage resulting from negative shocks to central banks’ balance sheets and their policy objectives. Concluding their analysis, Broeders and Schlooz (2021) present practical examples in the field of central bank risk assessment, risk mitigation and the disclosure of climate-related information.

1.1 Conducting monetary policy in view of climate change

The effects of climate change could also reduce central banks’ future room for policy maneuver. The impact of global warming on economic output is not limited to acute damage by storms, floods or droughts. Climate change may also reduce productivity growth. Economides and Xepapadeas (2018) describe climate change as a new propagation mechanism for total factor productivity (TFP) shocks, with GHG emissions lowering productivity in the long run given repeated climate-­related damage. In their model, carbon taxes could dampen growth in the short run, but in the long run output would be higher as negative TFP shocks from ­climate change would be absent.

The increasing uncertainty about the effects of climate change could increase precautionary savings and thus lower effective demand and drive up risk premia in financial markets. The stranding (i.e. devaluation) of assets due to climate change or climate policies might trigger financial losses for banks and hamper monetary policy transmission. Dafermos et al. (2018) model the effects of unmitigated ­climate change over a period of 100 years, including not only the stronger ­depreciation of capital and lower growth rates due to climate-related damage but also the rebalancing of households’ portfolios from corporate bonds toward ­deposits and governments securities that is triggered by higher economic uncertainty. According to their simulations, this climate-induced asset price deflation would cause corporate bond yields to rise strongly after 2080 ⁶³ . Bylund and Jonnson (2020) show that such an increase in uncertainty has a dampening impact on the equilibrium interest rate because it strengthens precautionary saving. If climate change depresses the interest rate level, negative shocks to the economy (some of which may be triggered by climate change itself) bear a higher risk of bringing policy rates close to the effective lower bound. Under these circumstances, it seems likely that monetary policy must rely on nonstandard instruments more ­often. Unfortunately, such effects would be reinforced if fiscal policy was also ­constrained in its capacity to stabilize the economy due to high debt levels, which in turn might also be caused by additional public expenditure for climate change adaptation or mitigation measures.

Climate change can also affect the transmission of monetary policy to the real economy. When central bankers change their monetary policy stance, they rely on financial intermediaries to pass on their policy impulse to firms and households. Since banks are a major source of funding in the euro area, the credit channel is of utmost importance for monetary policy transmission. Banks are exposed to ­climate-related risks via their assets. The impact of climate change may destabilize credit markets by driving up default probabilities, reducing liquidity or causing reputational damage. Damage caused by climate change can erode the value of ­collateral and reduce borrowers’ debt servicing capability, which in turn increases the probability of default and the numbers of nonperforming loans (NPLs). ­Climate policies like the introduction of carbon taxes may reduce debtors’ revenues or ­depress the value of their investments, creating stranded assets. ⁶⁴ Battiston et al. (2020) provide an assessment of the exposure of Austrian banks to transition risks based on the classification of climate policy-relevant sectors, but as the European Systemic Risk Board (ESRB, 2021) concludes, the quality and comparability of data is still wanting, especially with respect to the disclosure of firm-level data or forward-looking scenario analyses.

1.2 Strategic implications of climate change for central banks

A climate-related demand shock could happen if consumer preferences changed, e.g. if consumers seriously reduced their demand for fossil-fueled vehicles. In such a case, workers in the automotive industry would become unemployed and ­domestic demand would decline, as would consumer prices. An accommodative monetary policy reaction would stimulate growth and employment and furthermore facilitate investment in the necessary structural changes in the manufacturing sector.

The introduction of a carbon tax would rather act as a negative supply shock, depending on its pass-through and the use of revenues (see section 2.3). Energy prices would go up immediately and follow the pass-through to other production sectors, driving up inflation more broadly. Simultaneously, output would be ­reduced. Output losses are difficult to estimate in this scenario, however, as they crucially depend on the redistribution of carbon tax revenues. Euro area monetary policy would – given its medium-term orientation, which was only recently ­confirmed by the Eurosystem – be concerned by these price increases only if there were second-round effects from carbon taxes or if a carbon tax was introduced over an extended period. Many policy proposals suggest such an extended introduction phase for carbon taxes to give firms more time to adjust to new prices. In accordance with its secondary objective, namely to support the general economic policies in the EU, the Eurosystem could decide to let singular carbon tax-induced price increases happen without changing its monetary policy stance as long as there is no indication that these price increases would fuel a broader-based acceleration of inflation over the medium term. Such a strategy would rely crucially on the ­Eurosystem’s capability to identify the sources of price increases correctly.

In an analysis of different monetary policy strategies, McKibbin et al. (2020) run simulations of the effects of climate change on inflation and output, based on a multi-sector multi-region model. They compare pure inflation targeting with flexible inflation targeting and nominal GDP targeting strategies with respect to their effects on prices, output and carbon emissions. Whereas a purely inflation-­targeting central bank would change its monetary policy if, and only if, inflation deviated from its inflation target, a flexible inflation-targeting central bank follows a Taylor rule with non-zero weight on the output gap ⁶⁵ . Under nominal GDP ­targeting (or nominal income targeting), the central bank attempts to stabilize nominal GDP growth; this means that negative supply shocks that reduce ­economic output and stimulate prices at the same time would induce less vigorous monetary policy reactions than under inflation targeting. McKibbin et al. (2020) find that among the three monetary policy regimes, purely inflation targeting central banks react more strongly to the introduction of carbon taxes, causing a more substantial reduction in output while keeping inflation close to target, while flexible inflation targeting would allow for a modest temporary increase in inflation that would ­significantly reduce output losses, and nominal GDP-targeting results in the ­highest tax-induced inflation spike and the smallest output loss. But interestingly, carbon emissions would be reduced most effectively under pure inflation targeting, whereas flexible inflation targeting and nominal GDP targeting would result in a lower reduction of carbon emissions because they allow for output stabilization.

Moving the focus from the primary objective of price stability to the secondary objective of supporting the EU’s general economic ­policies, it is clear that policymakers other than central banks are more directly in charge of fighting climate change. Governments have more effective instruments at their disposal, e.g. ­environmental regulations, taxation or industrial policies (see following section). Coordinating these different policies properly will improve the outcomes. There is the political risk that the burden of climate action is shifted to central banks, which are less exposed to the electoral process, when democratically elected politicians try to avoid passing ­unpopular laws, e.g. laws introducing carbon taxes. Nevertheless, independent central bankers should refrain from transgressing the boundaries of their competence, as the public might see this as an unwarranted “mission creep.” Villeroy de Galhau (2021) explicitly rejects such allegations, ­emphasizing the relevance of ­climate change for price stability and for the smooth implementation of monetary policy. However, monetary policy cannot compensate for delayed or insufficient policy reactions by national policymakers. Therefore, it is important to discuss transparently about who can contribute what and whose actions and ­policies are most effective.

1.3 Climate change and the mandate of the Eurosystem

According to Article 3 Treaty on European Union (TEU), the EU “shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and ­social progress, and a high level of protection and improvement of the quality of the ­environment. It shall promote scientific and technological advance.” Evidently, the ­mandate of the ESCB proposes a clear hierarchy insofar as price stability is its ­primary objective. This means that, from any set of policy options, monetary ­policymakers should choose the option that contributes most to price stability, no matter how much this affects other objectives stated in Article 3 TEU. If two or more policy alternatives contribute equally to price stability, they can be prioritized according to their support of the secondary objectives.

However, the Treaty does not rank the objectives identified in Article 3 TEU. Prioritizing these objectives is an inherently political choice for which the ESCB has neither a democratic mandate nor the necessary competence. Such political choices are reserved for institutions that are directly accountable to the electorate, which can democratically express their approval or rejection of the choices made. It should be noted in this context that among the reasons why central banks have been granted independence is that they have one primary objective and do not ­engage in political deliberations that would necessitate more democratic accountability than is currently exercised. Therefore, any prioritization among the secondary objectives should closely follow the guidance provided by the political organs of the EU, i.e. the Council of the European Union and the European Parliament. It is in the interest of these political organs to express unequivocally any priorities they have agreed upon. However, the Eurosystem itself will independently decide how to support prioritized objectives and assess whether such support is feasible ­without prejudice to price stability.

Monetary policy is not capable of equally supporting all the objectives enumerated in Article 3 TEU. Some of them might come closer to the original field of expertise of central bankers than others. As for the “protection and improvement of the quality of the environment,” central banks have recently gained expertise in ­analyzing the economic and financial risks of climate change because of their ­function as financial supervisors ⁶⁶ ; hence, it could be argued that this objective is closer to their practical experience than others.

The mandate obliges the Eurosystem to support the general economic policies in the EU and not to design its own policies in these areas. Before central banks can decide on how to best support these general economic policies, they must be ­defined and implemented. Therefore, with respect to climate change, central banks are not policymakers but policytakers. The sooner the competent authorities decide upon the appropriate policies to fight climate change, and the more detailed these policies are, the better the Eurosystem can support them within the limits of its mandate. Arguably, the EU has already outlined its priority with the European Green Deal ⁶⁷ . Finally, the fight against climate change is singled out against all other objectives listed in Article 3 TEU given the irreversibility and potentially catastrophic impact of climate change. Some of the arguments listed here tend to support the view that the Eurosystem should prioritize action against climate change.

2 Economic policies to support climate change mitigation

2.1 Setting a carbon price

However, it should be noted that pricing externalities is not a magic bullet that solves all the economic and social challenges of climate change. As Stern and ­Stiglitz (2021) put it, “it is a fundamental mistake to begin the analysis of climate change under the premise that, but for the mispricing of emissions, the economy is ­efficient.” They refer to several problems, such as moral hazard, which becomes an issue when economic agents expect that large climate-related losses might be covered by the government, or imperfect capital markets where credit rationing prevails, which leads to underinvestment in climate-neutral technologies as these only offer uncertain returns. Initiatives by financial market regulators and supervisors, ­including central banks, address some of these issues by increasing transparency, setting standards and preventing green washing. A prominent example is the ­European Commission’s Action Plan on Financing Sustainable Growth with the EU ­taxonomy for sustainable activities at its core. The EU taxonomy is a classification system defining environmentally sustainable economic activities (European ­Commission, 2021). With the above caveats in mind, carbon pricing policies will be an important component of public policies supporting carbon transition, even though they will be accompanied by other tools.

2.2 Energy efficiency-enhancing regulations

2.3 Political economy aspects of climate-related economic policies

2.4 Green industrial policy

Stern and Stiglitz (2021) also stress the interdependence of tax policies and green industrial policy. They show that introducing higher carbon prices earlier would have the benefit of prompting earlier innovations. Both innovation and the diffusion of innovative technologies are path dependent; therefore, incentivizing firms to focus their R&D expenditure on emission-saving technologies and to adopt new energy systems early on would yield a double dividend.

Comparing all the discussed policies in terms of efficacy generates a hierarchy of instruments. The objective of fighting climate change is achieved most ­effectively by curbing the demand for emission-intensive goods. If the prices of these goods actually reflect their negative externalities, households and firms will reduce their demand for emission-intensive goods. Complementing positive price signals by ­active innovation policies that foster climate-neutral innovation augments the ­climate policy mix. Regulatory limits or bans on particular goods or technologies can curb GHG emissions very swiftly, but entail higher social costs, especially if emission-free substitutes are not available or only available at high prices.

3 Tackling climate-related financial risks

If financial institutions include the risks of climate change when calculating their risk-adjusted returns, the relative prices of climate-neutral and polluting ­assets would change in favor of climate-neutral assets. In response to these ­challenges, the Network for Greening the Financial System (NGFS), an association of central banks and financial supervisors, was launched in 2017, aiming to help accelerate the scaling-up of green finance and to develop recommendations regarding central banks’ role in the fight against climate change.

Accounting for climate-related financial risks requires the disclosure of ­climate-related information such as data on the carbon intensity of production or the location of assets, which is often still unavailable. One of the main objectives of the NGFS and of private sector initiatives like the Task Force on Climate-related Financial Disclosures (TCFD) ⁷¹ is the integration of climate risks into the ­customary risk management procedures of financial institutions. This requires the dissemination of available monitoring and assessment methods and the disclosure of the relevant data. Whereas the methods for monitoring climate risk exposures are already well established and scientific progress is ongoing, the availability of the relevant data is lagging behind. Although financial institutions emit comparatively little GHGs in their own operations, their exposure to climate-related risks can be significant due to loans to emission-intensive firms.

Integrating climate risks into risk management standards for banks and other financial institutions has a double benefit. It would make potential credit losses and market liquidity changes more predictable. And by prompting changes in relative asset prices of climate-neutral and GHG-emitting companies, it could also contribute to improving the funding costs for green firms and thus act as a catalyst for ­economic transformation. Nevertheless, this approach would have a rather limited effect on the overall transition to a climate-neutral economy compared to that of introducing effective carbon taxes, implementing regulatory changes that limit GHG emission or pursuing mission-oriented technology policies. The effect would be comparatively small because it would affect only the marginal funding conditions to the extent that banks and other financial intermediaries are able to price climate-related risks appropriately. Carbon taxes, by contrast, can change the ­retail prices of goods and, thus, effective demand for these goods. Still, green ­financial regulatory policies are an important measure in addition to green fiscal and industrial policies, as they might correct present market failures.

Financial regulation can only change the marginal cost of funding for firms and households. However, clear rules and guidance on climate risk management can prevent the financial sector from mispricing emission-intensive assets. Whereas the contribution of financial regulation to fighting climate change might be small, such rules can significantly improve the resilience of financial institutions. In any case, although the various policy levels may be complementary, the positive effects of introducing a carbon tax cannot be substituted by financial regulation, whose purpose is altogether different.

4 Monetary policy instruments and climate change

Table 1: Options for monetary policy instruments in dealing with climate change  

Instruments / criteria	Monetary policy ­effectiveness	Climate mitigation	Effectiveness in risk protection	Operational feasibility
Credit operations
Adjust counterparties’ eligibility	−−	+	+	?
Adjust pricing to reflect collateral composition	–	+	?	–
Adjust pricing to reflect counterparties’ ­climate-related lending (green funding support)	?	++	?	–
Collateral policies
Adjust haircuts to climate-related risks	?	+	+	–
Negative screening (e.g. exclude coal mining)	–	+	+	?
Positive screening (e.g. favor green bonds)	+	++	–	?
Align collateral pools with climate-related ­objective	?	++	+	–
Asset purchases
Tilt purchases (climate risk at issuer or asset level)	?	++	+	–
Negative screening (e.g. exclude nondisclosers)	–	+	+	?
Risk assessment and disclosure
Adapting climate-related credit ratings	?	+	+	+
Climate stress test of balance sheets	+	+	++	+
Disclose climate-related information on central bank assets and collateral	?	+	++	+
Incorporate climate-related risks into ­macroeconomic models	+	?	+	+
Source: NGFS, OeNB.
Note: Potential impact: ++ strongly positive; + positive; ? minimal; − negative; − − strongly negative.

The options presented in table 1 are evaluated with regard to four criteria: their monetary policy effectiveness, their contribution to climate mitigation, their effectiveness in risk protection and their operational feasibility. This evaluation is based on qualitative expert judgment and should not be interpreted as a recommendation of any of the listed measures.

4.1 Targeted credit operations

There are three specific options in this field:

• Adjusting counterparties’ eligibility: Central banks could make access to lending facilities conditional on counterparties’ disclosure of climate-related information or on the carbon intensity of their investments.
• Adjusting pricing to reflect the composition of pledged collateral: Central banks could charge a relatively lower interest rate to counterparties that pledge a higher ­proportion of low-carbon assets as collateral or set up a credit facility (potentially at concessional rates) accessible only against low-carbon assets.
• Adjusting pricing to reflect counterparties’ climate-related lending: Central banks could make the interest rate for central bank lending facilities conditional on the contribution of counterparties’ lending (relative to an appropriate benchmark) to climate change mitigation and/or the decarbonization of their business models.

4.2 Collateral policies

• Adjusting haircuts to better account for climate-related risks: Haircuts could be ­calibrated beyond what might be required from a traditional risk mitigation ­perspective in order to promote the market for sustainable assets. Central banks could increase the haircuts of carbon-intensive issuers or assets. Conversely, they could lower haircuts for more climate-aligned issuers or assets.
• Negative screening: Central banks could exclude collateral assets that are otherwise eligible on the basis of their issuer-level climate-related risk profile for debt securities or on an analysis of the carbon performance of their underlying assets for pledged pools of loans or securitized products.
• Positive screening: Central banks could accept sustainable collateral that would otherwise not be eligible to incentivize banks to fund projects that support ­environmentally friendly activities (e.g. green bonds or sustainability-linked ­assets).
• Aligning collateral pools with a climate-related objective: Central banks could ­require counterparties to pledge collateral in a way that it complies with climate-related objectives at an aggregate pool level.

However, since haircuts deal with liquidity risk, they might not be ideal tools for providing climate policy incentives while keeping monetary policy effective. Moreover, screening strategies could have different impacts on issuers depending on their size, or they could create distortions across asset classes.

4.3 Asset purchases

• Tilting purchases: Central banks could rebalance their asset purchases according to climate-related risks and/or criteria applied at the issuer or asset level.
• Negative screening: Central banks could exclude some assets or issuers from their purchases if these fail to meet climate-related criteria.

Ferrari and Nispi Landi (2020) study the effects of “green QE,” which temporarily tilts a central bank’s balance sheet toward bonds issued by firms in non­polluting sectors. They find that for green QE to be effective, there must be ­imperfect substitutability between green and brown bonds. While a temporary green QE helps mitigate emissions, it has only limited effects on reducing the stock of pollution. Battiston and Monasterolo (2019) show that weights the ECB ­introduced for carbon-intensive companies that diversify their portfolio toward low-carbon investments would support the transition to green finance in line with market neutrality and decrease the ECB’s exposure to potentially carbon-stranded assets. However, this would imply that the ECB considers to negatively discriminate carbon-intensive economic activities in line with the European Commission’s EU taxonomy, whose legal implementation is still pending.

While the carbon intensity of central bank’s corporate bond portfolios has ­attracted a lot of attention, QE asset purchases are typically dominated by sovereign bonds. Their environmental impact can be assessed on the basis of governments’ decarbonization commitments. Sveriges Riksbank (2020) has divested municipal bonds issued by high-emitting provinces in Canada and Australia. On a positive note, several European governments have started issuing sovereign green bonds. The environmental effectiveness of such bonds is questioned, however, especially by countries with high emission intensity (Hardy, 2020). In contrast, Monasterolo and Raberto (2017) find that large-scale purchases of green sovereign bonds help develop a green bond market, accelerate transition by green investment and reduce the risk of stranded assets for the financial system. ⁷⁷ The environmental materiality of bonds issued by supranational institutions such as the European Investment Bank (EIB) is less controversial. Labeled “the EU climate bank,” the EIB (2020) ­announced that it would increase its support to climate and environmental action to levels that exceed 50% of its overall lending activity by 2025 while ensuring that the remainder of its lending is in line with the Paris Agreement.

4.4 Risk assessment and disclosure

• Adapting climate-related credit ratings: Central banks could contribute to the transparent and consistent incorporation of climate-related financial risks in credit ratings. This includes a careful choice of credit rating agencies considering their sustainability assessment capabilities and the development of minimum standards in internal ratings.
• Climate stress test of central bank balance sheets: Central banks could assess their risk exposure to climate change and enhance their climate risk assessment capabilities.
• Disclosing climate-related information on central bank assets and collateral: Central banks could comply with TCFD recommendations and the respective policies such as the EU legal framework which is currently being developed (e.g. the Corporate Sustainability Reporting Directive – CSRD). Beyond that, central banks could also require climate-related disclosure for assets to qualify as eligible collateral and for asset purchases.

5 Concluding remarks

Carbon taxes, emissions trading schemes, direct regulations or green industrial policies can support the transition to a carbon-neutral economy more effectively and efficiently than monetary policy. In turn, a well-managed transition would ­reduce the risks to financial market stability and thus help central banks achieve their objectives in line with their mandate. Whatever approach central banks choose, financial market supervision and monetary policy will complement but never replace governments’ decarbonization efforts.

Different monetary policy strategies have different implications for climate change. Even for inflation-targeting regimes, simulations indicate significant ­differences in outcomes with respect to inflation, output stabilization and the ­reduction of GHG emissions. A similar variance in climate outcomes also applies to different monetary policy instruments. The framework for credit operations, collateral policies, asset purchases or asset quality assessment and disclosure could be adjusted to reflect the risks of climate change and to contribute to the greening of the financial system. A risk-oriented (or protective) approach on central bank climate action seems to be a good starting point and basis for pragmatic consensus. In this spirit, the ECB’s new monetary policy strategy statement states that climate factors will be incorporated in future monetary policy assessments. According to the statement, the design of the ECB’s monetary policy operational framework will be adapted in relation to climate-related disclosures, risk assessment, corporate sector asset purchases and the collateral framework (ECB, 2021). Sveriges Riksbank (2020) has shown that risk-orientation can go very far by implementing a rigorous sustainability strategy for its asset purchases and foreign exchange reserve management. The Bank of England (2021), in turn, is now moving ahead with an ambitious proactive strategy to explicitly support an orderly economy-wide transition to net zero GHG emissions by 2050 through its quantitative easing measures. While the direction of the path is clear, the speed of actions toward “net zero ­central banking” will continue to be matter of discussion (Robins et al., 2021). Eventually, all public and private economic actors will have to contribute according to their capabilities to achieving a climate-neutral economy by the mid-21st ­century.

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Event wrap-up

Gender, money and finance

48th OeNB Economics Conference in cooperation with SUERF and the JVI (May 20/21, 2021)

Petia Niederländer, Doris Ritzberger-Grünwald, Karin Turner-Hrdlicka ⁸¹

In a nutshell, session 1 addressed the question how to achieve more gender-­inclusive visions of and answers to our current challenges in economic ­policymaking. The discussions in session 2 confirmed that increased female participation can have a decisive influence on central bank policies. Session 3 delved into the debate about the relationship between gender and risk-taking. Session 4 addressed, among other topics, persistent gender differences in financial literacy, also in the context of the COVID-19 pandemic.

In kicking off the event, Barbara Kolm (OeNB Vice President), highlighted the paradox that while the economic fallout of the pandemic had disproportionately hit sectors with high female employment shares and/or prevented many women from continuing to work given increased childcare duties, ⁸³ women were strikingly ­underrepresented in public task forces created to tackle these very challenges: a survey of 115 national COVID-19 committees in 87 countries shows that only 3.5% of these task forces had gender parity, while more than 80% were led by men. ⁸⁴

Judging from the fate of Shakespeare’s fictitious sister whom Virginia Woolf had invented for her 1929 book, A Room of One’s Own, to describe the unthinkable obstacles faced by young women attempting to express their genius at the time, Kolm acknowledged that we have come a long way. And still, there are lessons to be learned from metaphorical sisters of our day and age: “…if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different ­today.” ⁸⁵ In this vein, she ended with the clarion call: “Let’s get to work!”

Session 1: Gender and economic policy making

Why are so few women in top jobs and what can be done to change that?

Can things be done to change that? Yes. The ECB is trying hard by setting ­targets on a very granular level, but also by focusing on new entrants, having ­committed to fill 50% of all vacancies at all levels with women by 2026. For this to happen, the ECB relies on role models, godmothers and godfathers, leadership training and diversity ambassadors. Beyond the organization, the ECB is funding scholarships for prospective post-master level students who are female and in ­situations of financial hardship.

Challenges and solutions for a better involvement of women

Lagarde and Georgieva also confirmed their own responsibility and involvement. At the IMF, Lagarde had built the pipeline of women for managerial roles, and now, under Georgieva, the IMF has increased the share of female directors from 25% to close to 40%. But most importantly, the IMF is very actively engaged in building capacity in financial authorities, especially on the issue of gender-based budgeting, partly also through training provided through the Joint Vienna ­Institute. And, for the first time in history, the IMF has appointed a senior adviser on gender.

Turning to the room and need for gender-related policymaking coming out of the crisis, Georgieva identified three problems that need to be addressed: labor market participation of women and their ability to contribute to the economy (through a supportive tax regime and gender-based budgeting); the homemaking work women do and what can be done to even the playing field between men and women; and policies related to gender-based violence.

On the importance of role models

Eye-openers during the pandemic and final takeaways

From the audience, Lagarde was asked about the low-interest rate world and if women, who are more cautious, are missing out. Lagarde cited an encouraging study which showed that women actually outperformed men – because women took a longer-term view of investment, trading at a somewhat lower frequency. (See also session 3 below.) Georgieva added that women tend to be more inclusive and more willing to listen to different points of view before coming to closure.

Regarding takeaways, Lagarde said that the way out was to support women and to strengthen their confidence whenever needed, recommending the book The confidence code: the science and art of self-assurance – what women should know. ­Georgieva cited Eleanor Roosevelt: “’Women are like tea bags. You don’t know how strong they are until you put them in hot water.’ So, my message to young women: jump into this hot water. You are strong!” With a view to pandemic-­related policymaking, Lagarde concluded, “I would say just one thing: put people first.” To which Georgieva added: “Disaggregate your data. You need to understand how policies affect different groups of people, how they affect women. And then base your response on what you learn.”

Session 2: Central bank decisions by committee: does gender matter?

Facts and figures – where do we stand?

Of the three explanatory variables tested – gender gap index, staff gender ratio and central bank independence – Masciandaro et al. (2020) only found the staff gender ratio to have a significant positive influence on the share of women in top central banking positions. Thus, a policy conclusion would be that we should start at the bottom, having more women in these institutions in general. Ritzberger-­Grünwald agreed but added that many (vice) governors had joined their central banks from other organizations.

Contributing the Nordic view, Rannveig Sigurdardóttir (Deputy Governor, ­Central Bank of Iceland) explained that Iceland had a relatively good starting point, with a female staff ratio of approximately 50% of staff, family-friendly workplaces and equal pay implemented at the central bank. Yet, it would be important to ­further enhance recruiting processes and open up career paths, given remaining room for improvement.

Sylvie Goulard (Vice Governor, Banque de France) added that even with many female deputies, central banking at the top was still a man’s world, citing a male share of 93% at the ECB (Governing Council, 1998–2021), 89% in the Fed (FOMC, 1960–2021) and 88% at the Bank of England (Monetary Policy Council, 1997–2020) according to Istrefi and Sestieri (2018). To help staff to balance work and family life, the Banque de France had concluded a gender equality agreement, which did lead to an increase of the proportion of women in senior positions. On the downside, she pointed out the risk of doing part time, which typically put an end to careers. In terms of action points, she highlighted the need to better balance gender across professions (with 73% women in the human resources department at the Banque de France, but only 18 in banknote manufacturing and 30% in the IT growth area).

Ana Ivković (Vice Governor, National Bank of Serbia) had a success story to tell, with Jorgovanka Tabaković, Governor since August 2012, now being in her second term. Only every tenth central bank is headed by a woman, and according to the OMFIF Gender Balance Index 2021, the countries with a female governor tend to be small countries. Surprisingly, the Serbian central bank has no gender policies in place. Only “­normal” rules and standards apply, as set by the government, like maternity leave and financial assistance at the birth of a child, also apply at the bank.

Do committees work differently when women are present?

Sigurdardóttir argued that the literature was in fact inconclusive, finding ­evidence for both more dovish and more hawkish behavior of women. At Iceland’s central bank, at any rate, male and female monetary policy decision-making was well-aligned. More generally, she argued that gender balance in committees was a question of legitimacy: gender balance was necessary to ensure a democratic policy outcome. Overall, it was important to bring in diverse views of diverse people, not only with a view to increasing the credibility of the decision-making process. ­Gender diversity also enriches the discussion and broadens the range of topics dealt with, to include e.g. environmental issues.

Goulard steered the discussion to the more relevant question: What do women expect from us? What do women tell us? As the listening events of the ECB and of the Banque de France showed, women are concerned about declining purchasing power, the worsening of the economic outlook, unemployment and job precariousness, climate change and growing inequality and poverty. She joined ­Sigurdardóttir in saying that diversity was an ethic imperative, but above all a way to double the pool of talent. Concerning monetary policy decisions, diversity is de facto a tool to improve communication. And she joined Lagarde in trying to do away with the distinction between doves and hawks by supporting owls. Ivković rounded off the picture by quoting Serbia’s Governor Tabakovic, incidentally ­appointed “Central Banker of the year 2020”: no one can do the job alone: at the end of the day everything is teamwork.

Session 3: Gender and risk-taking: implications for financial firms and regulation

The widespread belief that women are more risk averse than men is rooted in stereotypes

Renée B. Adams (Professor of Finance at Saïd Business School, University of ­Oxford) agreed that women were not more risk averse on average than men. Using information about the directors of listed companies, Adams found that in ­particular female ­managers at financial firms even show a remarkably lower level of risk aversion than men. Regarding the question whether a more balanced gender mix would enhance social responsibility, Adams concluded that the more meaningful question would be whether financial firms would benefit from debiasing and removing (gender-related and finance-specific) barriers for advancement. The answer to this question was clearly yes.

A more balanced gender mix leads to a higher level of innovation, better business results and improves the CSR profile of financial firms

A progressive gender and diversity balance not only boosts innovation and ­business results but may also improve the corporate social responsibility (CSR) profile of organizations, argued Khlood Aldukheil (CEO of Erteqa Financial ­Company): “I do believe that women will bring stability to the CSR agenda.” ­According to Aldukheil’s experience of 25+ years, women are risk-takers, just like men, but tend to be more diligent due to a “caretaker instinct.” Aldukheil was ­optimistic that education and knowledge would give women the confidence to be less risk averse and shared her views on related initiatives and recent changes for women in Saudi-Arabia, including government initiatives to increase female ­employment, remove employment restrictions and guardian requirements, and lift the female driving ban to support working women. Gender-specific obstacles might be overcome by changing the underlying social setting, and specific ­campaigns could help to shift the general mindset, Aldukheil concluded.

Gerda Holzinger-Burgstaller (CEO of Erste Bank Austria) added that financial firms and institutions benefit significantly from encouraging career paths for talented women, as diverse and heterogenous teams are more innovative, exploiting cognitive diversity. In addition to successful women acting as role models when it comes to gender diversity, this requires clear commitments: top-down target setting (such as quotas); diversity-based talent management and succession planning; and measures endorsing gender diversity within the fit & proper framework, making diversity a leadership accountability and enforcing data-based reporting and monitoring. To avoid career paths being abruptly stopped during parental leave, Erste Group initiatives, for instance, include efforts to keep in touch with absent staff and continue to treat them as part of the organization.

Turner-Hrdlicka concluded that given the differences among men and among women, respectively, the most meaningful way forward might be to focus on individuals even more so than on gender differences. Summarizing the panelists’ contributions, she underlined the strong case for more gender diversity in financial firms and institutions, pointed to ensuing managerial responsibilities and recalled key action necessary in this respect: managing talent, providing opportunities and empowerment, setting and monitoring targets, and improving financial education.

Session 4: Gender, financial literacy, inflation and COVID-19

Anamaria Lusardi (Professor at the George Washington University School of Business) shared the latest Personal Finance Index data obtained under a long-term survey project launched in 2017 to assess financial literacy. The index is built from responses to 28 questions about earning, consuming, saving, investing, ­managing debt, insuring, comprehending risk and information sources. The data confirm a persistent gender gap: on average, women correctly answered 49% of the 2020 P-Fin Index questions, and men 56%. Men outperformed women on each topic, above all in areas which are particularly relevant during a pandemic, like comprehending risk, insuring, and investing.

Lusardi highlighted the role of confidence or a lack thereof, in arriving at a ­better score, since women have been more likely than men to answer “do not know” across all areas. When the “do not know” option was removed from the survey, women fared better. Similar gender differences have been established with the indicator of financial well-being. Because gender differences and confidence building start at a young age and financial literacy is directly linked to future ­financial wellness, Lusardi concluded that investing in early education and focusing on vulnerable groups like women will be the road to recovery from this pandemic.

Gender & finance: an Austrian perspective

In the latest International Survey for Adult Financial Literacy conducted in 26 countries Austria came in third. In an effort to improve national financial ­literacy competencies further, Austria’s finance ministry launched a project to ­develop a national financial education strategy in May 2020. Its mapping report Financial Literacy in Austria, released in cooperation with the OECD, ­recommends a comprehensive approach including efficient stakeholder ­coordination and audience-targeting based on evidence or policy priorities. Research and ­program evaluation are likewise encouraged. Sommer-Hemetsberger concluded that a national strategy would increase financial well-being and resilience in Austria, helping to reduce gender imbalances in the economy and society.

Can financial education help bridge the gender gap? Reflections from Singapore

Yoong illustrated how socially significant such interventions can be, reporting that the participants had remained in close contact, encouraged by alumni ­meetings. They felt empowered to discuss financial questions freely with their peers. In conclusion, the success of financial education programs relies not solely on the curriculum but also on tools, networks, self-efficacy and life-long learning ­opportunities provided.

Gender & finance: a central bank’s perspective

With reference to Brown and Graf (2013), Maechler shared survey evidence according to which the three staple questions on financial literacy – about the ­concepts of compound interest, inflation and risk diversification – were understood by only 50% of Swiss respondents (which still is a high number in international comparisons). Although 62% of men answered all three questions correctly, compared to only 39% of women, the gender gap in financial literacy is not only driven by correct or incorrect answers. Women did not provide answers or gave “don’t know” answers twice as often times as men, corroborating the assumption of self-doubt in women concerning financial and economic matters.

A general knowledge gap?

Kritzinger went on to speak about measurement bias. Literacy exercises ­usually lean towards men’s interests and exclude women’s life experiences by ­asking for factual knowledge. Furthermore, Kritzinger revisited the fact that men tend to guess even if they do not know the correct answer, while women won’t and suggested dropping the “do not know” response option. With regard to the ­pandemic conditions, she listed measures to actively boost confidence, reduce ­socioeconomic disadvantages, provide gender-friendly socialization during childhood and adjust knowledge measurement tools as the vision for the future.

Petia Niederländer wrapped up the conference with the encouraging conclusion that a national strategy carried the promise of creating a culture of financial ­literacy spanning gender, age and time and should therefore be promoted by ministries, central banks and other public institutions. Keeping the dialogue going between all stakeholders, including the private sector, could provide for new inspirations and help closing the gender gap.

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