Monetary Policy and the Economy Q1/04

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• Monetary Policy and the Economy Q1/04 (PDF, 667 kB) March 2004.

Studies and Analyses

• Subdued Economic Activity in the Euro Area and in Austria despite International Recovery (PDF, 196 kB) Fenz, Gruber, Pointner. Fenz, Gruber, Pointner - Monetary Policy and the Economy Q1/04 At the worldwide level, economic recovery appears to be picking up even more momentum. The U.S. has seen sharp increases in growth given the strong impetus from consumer spending and investment. In Asia, Japan seems to have ended its long period of economic recession, and the Chinese and Southeast Asian economies have continued to expand rapidly. The growth outlook has also improved for Eastern Europe. At the same time, however, economic recovery is still moderate in the euro area, and it appears that the risks have increased more than they have decreased. The positive effects of robust international demand are being offset by the subduing effect of the euro's rally, and domestic demand — especially consumer spending — has recently been less dynamic than expected. However, the inflation outlook is still assessed as favorable. Since the beginning of 2004 inflation in the euro area has been below 2% and is expected to remain at this low level. For Austria, economic development in the first half of 2004 is currently forecast with cautious optimism, although the data recently released for the second half of 2003 clearly did not live up to expectations. This is another reason why the situation in the Austrian labor market is still tight and not expected to improve in the first half of this year. Inflation will remain at its current low level. So far, the most striking event in 2004 has been the May 1 enlargement of the European Union to include ten new Member States. For most of the new members, acceding to the EU represents the climax of a political and economic transformation process, which had begun in 1989 and has generally been highly successful. The enlargement, adding another 74 million people to the EU's population, was also a unique event for the EU itself. In economic terms, we can expect the enlargement to have positive effects on medium-term growth throughout the EU. At the same time, new challenges have arisen regarding the monetary integration of these countries and the redefinition of the EU's policy on neighboring countries (proximity policy). en Forecast Mar 31, 2004, 12:00:00 AM

• Determinants of Long-Term Growth in Austria – A Call for a National Growth Strategy (PDF, 222 kB) Gnan, Janger, Scharler. Gnan, Janger, Scharler – Monetary Policy and the Economy Q1/04 This study, which offers a thorough analysis of growth in the past four decades, pinpoints total factor productivity (TFP) and human capital as the main engines of growth in Austria. In a further step it sheds light on the determining factors of TFP against the backdrop of a theoretical framework. The authors present evidence for the importance of innovative activity and human capital. They also examine the role of Austria's institutions involved in economic policy making as well as of economic rules and policies. Austria's dynamic external business is shown to foster productivity; EU enlargement could entail new agglomeration advantages. The study emphasizes the productivity-enhancing role of competition policy and market regulation. In their conclusions, the authors call for a long-term growth strategy for Austria and provide suggestions for such a strategy. en Growth Strategy Mar 31, 2004, 12:00:00 AM

• The International Financial Architecture: Official Proposals on Crisis Resolution (PDF, 155 kB) Just. Just - Monetary Policy and the Economy Q1/04 The absence of a clear framework for the resolution of international financial crises introduces many risks and raises legal uncertainties about how to deal with sovereign financial crises. While a fairly broad consensus exists on how to prevent financial crises, namely by strengthening macroeconomic policies and improving financial supervision and regulation, views on how to manage and resolve sovereign debt crises are rather diverse. At the International Monetary Fund's (IMF) annual meeting in Prague in the year 2000, the international community tried to address this issue by advocating the Private Sector Involvement (PSI) initiative. PSI, however, never amounted to more than public statements that lack in substance. Consequently, this led to widespread dissatisfaction among the main participants of the international financial architecture. Debtor countries grew more discontented with the governance of the international financial system, and the private sector started to accuse the IMF of increasing the time inconsistency of its policies. Finally, in November 2001, the Deputy Managing Director of the IMF, Anne Krueger, proposed a legal framework for the resolution of sovereign insolvency crises, a Sovereign Debt Restructuring Mechanism (SDRM). This mechanism would have rendered PSI more operational, in addition to addressing many market failures of today's international financial architecture. This paper addresses some of the key issues related to the international financial architecture and the resolution of sovereign debt crises. It is important to note that while support for an SDRM has waned for the time being, its discussion has nevertheless been beneficial and has produced several tangible results. en International Financial Architecture Mar 31, 2004, 12:00:00 AM

• The Impact of ATM Transactions and Cashless Payments on Cash Demand in Austria (PDF, 174 kB) Stix. Stix - Monetary Policy and the Economy Q1/04 The aims of this study are twofold: to determine the levels of cash inventories held by Austrians and to examine how ATM transactions and cashless payments affect their demand for cash. The key results of this study are based on survey data on the cash withdrawal habits of Austrians aged 14 and over. The results suggest that the cash held by this group of individuals for transaction purposes accounts for only a relatively small share of the total cash in circulation (approximately 10%). Furthermore, it can be seen that individuals who use ATMs withdraw cash more frequently and consequently hold significantly smaller amounts of cash than individuals who do not use ATMs. The study also deals with cashless payments, which were found to have had an impact on the use of cash: the share of cash payments has fallen since 2000 (projections suggest a decline of some 6 to 7 percentage points from 2000 to 2002). This development is attributable primarily to robust growth in debit card transactions. Despite the rise in cashless payments, currently the share of cash payments (in value terms) is likely to be above 70%, so that cash remains by far the most important means of payment in Austria. The results of this study therefore show that ATM transactions and the increased use of cashless payments have had a significant impact on cash demand in Austria and will probably continue to do so in future. Since, however, cash withdrawal and payment habits are unlikely to change overnight, this development should not have much impact on monetary policy. en ATM transactions, Austria Mar 31, 2004, 12:00:00 AM

• Inflation Differentials in Europe: Past Experience and Future Prospects (PDF, 242 kB) Égert, Ritzberger-Grünwald, Silgoner. Égert, Ritzberger-Grünwald, Silgoner - Monetary Policy and the Economy Q1/04 This paper analyzes past and potential inflation differentials for current EU Member States and the acceding countries. Although inflation differentials decreased significantly over the last ten years or so within the EU-15/EU-12 and the acceding countries, they are still on top of the policy agenda. Indeed there are a number of potential causes of inflation differentials. They range from cyclical factors via the exchange rate pass-through and oil price shocks to differences in productivity advances and changes in indirect taxes. Regarding the impact of these factors on inflation, a number of similarities can be found across countries. At the same time, because differences exist, e.g. in the cyclical position, the degree of openness, oil intensity or dependency as well as price and productivity levels, inflation differentials are not likely to vanish completely in the future. We also argue that the often cited catching-up factors, such as the Balassa-Samuelson effect, seem to be considerably weaker than generally believed. In addition, inflation differentials could be clearly associated with inappropriate national fiscal and structural policies. en inflation differentials Mar 31, 2004, 12:00:00 AM