Monetary Policy and the Economy Q4/05

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• Monetary Policy and the Economy Q4/05 (PDF, 883 kB) December 2005.

Studies and Analyses

• High Price Competitiveness of Austrian Exporters and Recovery of Private Consumption Support Economic Activity-Economic Outlook for Austria from 2005 to 2007 (December 2005) (PDF, 408 kB) Fenz, Schneider. Fenz, Schneider – Monetary Policy and the Economy Q4/05 According to the December 2005 economic outlook of the Oesterreichische Nationalbank (OeNB), Austria's real gross domestic product (GDP) is projected to increase by 1.9% in 2005. Economic growth is then expected to accelerate to 2.3% in 2006 and in 2007. Inflation according to the Harmonised Index of Consumer Prices (HICP) will quicken temporarily to 2.2%in 2005 as a result of the rise in the price of oil and services and then moderate to 1.9% in 2006 and further to 1.7% in 2007. en Forecast, Austria. Dec 31, 2005, 12:00:00 AM

• The Natural Rate of Interest — Concepts and Appraisal for the Euro Area (PDF, 413 kB) Gnan, Ritzberger-Grünwald. Cuaresma, Gnan, Ritzberger-Grünwald – Monetary Policy and the Economy Q4/05 Real interest rates in the euro area fluctuated sharply between —4.2% and +7.7% over the past half century. A key question for monetary policy makers and economic agents is: What is the „neutral,” „equilibrium” or „natural” real interest rate to which current rates might eventually move back? In the long run, the natural rate of interest is influenced by productivity developments, population growth and the time preference for consumption over saving. In the medium run, the natural rate may also be influenced by fiscal policy, the structure of financial markets, and inflation risk premiums. Globalization should over time contribute to an international convergence of natural rates. Empirical estimates of the natural rate differ considerably and are associated with large error margins; estimates in „real time” suffer from additional uncertainty. Monetary policy rules based on the natural rate (e.g. Taylor rules, real interest rate gap) should thus be treated with great caution. Monetary policy might use the natural rate to consider appropriate responses to technological and demographic shocks. The majority of recent estimates for the euro area points to a fall in the natural rate to a level as low as 1.5%. This may reflect a more credible monetary policy and deep euro area financial markets, but also slowing productivity growth and a decline in the working-age population. In the future, the growing need for private savings for retirement might lower the natural rate, whereas „fiscal consolidation fatigue” might raise the natural rate. en interest rates, monetary policy, monetary policy rules. E43, E52, C32 Dec 31, 2005, 12:00:00 AM

• Price Setting in Austria — Results from the Eurosystem Inflation Persistence Network (PDF, 319 kB) Kwapil, Rumler. Kwapil, Rumler – Monetary Policy and the Economy Q4/05 This study examines price setting in Austria using micro observations of Consumer Price Index (CPI) data on the one hand and a one-time survey on firms' price-setting practices on the other hand. The analysis of the micro CPI data shows that consumer prices are adjusted roughly once a year averaged over all items in the CPI. However, there are enormous differences across sectors: The prices of energy products and unprocessed food are adjusted most often whereas the prices of nonenergy industrial goods and of services are changed less frequently. Austria ranks roughly in the middle range among euro area countries in terms of the frequency of price changes; it does not stand out for either especially rigid or especially flexible prices. Judging from the data set analyzed, the euro cash changeover did not bring about a significant inflationary effect. The supplementary company survey revealed that (producer) prices are reviewed four times as often as they are actually adjusted — about once a year. Price rigidity evidently tends to arise more at the second level of price formation, namely at the actual price-setting level. Firms state implicit (long-term customer relationships) and explicit contracts as causes for delaying price adjustments. en inflation persistence, nominal rigidity, price-setting. E31, L14 48–60 Dec 31, 2005, 12:00:00 AM

• A Disaggregated Approach to Analyzing Public Finances in Austria (PDF, 373 kB) Grossmann, Prammer. Grossmann, Prammer – Monetary Policy and the Economy Q4/05 The budget elasticities derived in this study indicate that a 1% deviation of GDP from the long-term growth potential causes a purely cyclical change of 0.38% of GDP in Austria's budget balance. The predominance of progressive income taxation in Austria is reflected in the estimated elasticity of direct taxes on households to average income of 1.3. We expected the elasticity of direct taxes on enterprises to gross operating surplus to come to 1, since the corporate income tax is a proportional tax; the computation result of 0.9 confirms our assumption. The elasticity of indirect taxes to private consumption of 0.97 documents both the high share of proportional taxes and the impact of specific taxes, while the elasticity values of social security contributions and pension insurance contributions to average income (0.99 and 1) reveal the close correlation of these budget categories with the macroeconomic base variable. The elasticity of unemployment benefits to the number of unemployed persons of 0.9 results from the rising average duration of unemployment. Between 2000 and 2004, the general government's structural budget balance (i.e. the budget balance adjusted for cyclical effects and one-off measures) improved from —2.1% to —0.9% of trend GDP. The development of the structural budget balance in Austria is above all shaped by discretionary measures based on legislative changes. The deviation of budget categories' development from the underlying tax base, which is especially pronounced for progressive taxes, and the deviation of the tax base from GDP are only of minor importance in the development of public finances in Austria. en fiscal policy, budget elasticities, error correction model, cyclical adjustments. E6, H6, C50 Dec 31, 2005, 12:00:00 AM

• The European Integration Process — A Changing Environment for National Central Banks (PDF, 186 kB) Schmidt. Schmidt – Monetary Policy and the Economy Q4/05 On October 21, 2005, the Oesterreichische Nationalbank (OeNB) held a high-level workshop labeled “The European Integration Process — A Changing Environment for National Central Banks” for an international audience. The workshop provided an overview of the changing role that national central banks (NCBs) play in Europe, with a focus on the institutional and legal challenges the individual NCBs face. Moreover, it provided a platform for exchanges among NCB representatives of countries currently undergoing different stages of European integration. en european integration, national central banks. F02, F15, F42 Dec 31, 2005, 12:00:00 AM

• Fiscal Spending Rules in Europe (PDF, 200 kB) Grossmann, Hauth, Pop. Grossmann, Hauth, Pop – Monetary Policy and the Economy Q4/05 A workshop on Fiscal Spending Rules hosted by the Austrian Government Debt Committee in cooperation with the Oesterreichische Nationalbank (OeNB) on September 29, 2005, explored two major issues: First, whether national fiscal rules that tie in with the EU fiscal framework can help sustain sound fiscal policies in Europe, and second, what aspects must be taken into consideration when designing such spending rules. Additionally, contributors presented two proposals for the implementation of fiscal spending rules in Austria. en public finance, fiscal policy, fiscal rules. H50, H61, E6 Dec 31, 2005, 12:00:00 AM