Monetary Policy and the Economy Q1/05

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• Monetary Policy and the Economy Q1/05 (PDF, 912 kB) March 2005.

Studies and Analyses

• Slowdown in Global Economic Momentum – Asia and the USA To Remain Growth Drivers of World Economy in 2005 (PDF, 289 kB) Elsinger, Fenz, Haar-Stöhr, Hildebrandt, Reininger, Reitschuler. Elsinger, Fenz, Haar-Stöhr, Hildebrandt, Reininger, Reitschuler – Monetary Policy and the Economy Q1/05 In 2004, despite the sudden jump in oil prices and the ballooning trade deficit, the U.S. economy grew by 4.4%, or more robustly than ever since 1999. In the same year, growth in consumer prices peaked at 3.3% — the highest level in four years. In early February 2005, the U.S. Fed raised its key interest rates by 25 basis points for the sixth time since mid-2004. Whereas Japan slipped back into a period of recession, other Asian economies continued growing apace in 2004. The second half of the year 2004 saw a slowdown in GDP growth momentum in the euro area. Despite positive stimuli from investments, growth rates declined, due to weaker net exports and still very subdued private consumption demand. Consumer restraint can partly be explained by the sluggish growth in real disposable income as a result of higher energy prices, which are also responsible for the rise in inflation. In the first three quarters of 2004, most new Central European EU Member States expanded at a faster pace than in 2003 as a whole. The upward pressure on prices (partly induced by EU accession) was very strong in the new Member States in 2004. In Romania, an EU candidate country, growth rocketed to an outstanding 10.0% in the third quarter. Following weak growth in the fourth quarter of 2004, Austria's economy is regaining steam, but is not immune to the current slowdown in growth in the euro area as a whole. The OeNB's short-term indicator forecasts 0.4% seasonally adjusted growth in Austria's real GDP for the first and 0.5% for the second quarter of 2005 (each compared with the previous quarter). en Economic growth Mar 31, 2005, 12:00:00 AM

• Demographic Fluctuations, Sustainability Factors and Intergenerational Fairness – An Assessment of Austria's New Pension System (PDF, 365 kB) Knell. Knell – Monetary Policy and the Economy Q1/05 This study discusses important elements of Austria's recently harmonized statutory pension system. In particular, the author investigates in how far the new system responds to the twofold demographic challenge of declining birth rates and increasing life expectancy and what this means in terms of fiscal sustainability and intergenerational redistribution. Austria's defined benefit system is found to have more in common with Germany's system of earnings points than with Sweden's notional account system — with the exception that the sustainability factor, the adjustment mechanism triggered by demographic changes, has been designed differently in Germany and in Austria. A critical analysis of the Austrian provisions identifies the following problems: First, the application of the sustainability factor is activated only by deviations from projections and not to demographic movements as such. Second, adjustments are not to be automatic. Third, the requirement of an “even adjustment7” is not spelled out in detail. Fourth, it is doubtful whether evenness is a desired feature in the first place since generation-specific reproductive behavior is neglected in this scenario. Overall, the basic structure of Austria's new model gets a favorable rating, as it increases the degree of intergenerational fairness, supports individual, intersectoral and international flexibility and corrects some design flaws of the old pension regime. Conversely, weaknesses are identified with regard to the transitional arrangements, the contribution side and the sustainability factor. en Pension System Mar 31, 2005, 12:00:00 AM

• The Research and Development System in Austria – Input and Output Indicators (PDF, 318 kB) Janger. Janger – Monetary Policy and the Economy Q1/05 This paper analyzes the efficiency of research and development activities in Austria in comparison with other countries. Public and private R&D spending, which has been increasing steadily for years, is evaluated against a set of performance indicators, such as the number of scientific publications and patents. The efficiency of Austria's R&D system is currently rated “average.” This may change in the future, given that productivity growth in the Austrian economy is declining despite the continually rising research and development ratio. In his conclusions, the author presents suggestions for increasing the efficiency of the system, particularly in the areas of university education and research, in the light of the strong interaction with the corporate sector. en Research and Development Mar 31, 2005, 12:00:00 AM

• Fundamental and Nonfundamental Factors in the Euro/U.S. Dollar Market in 2002 and 2003 (PDF, 348 kB) Haushofer, Moser, Unger. Haushofer, Moser, Schardax, Unger – Monetary Policy and the Economy Q1/05 The goal of this study is to identify factors which can explain the substantial appreciation of the EUR/USD exchange rate in the period from 2002 to 2003. Our analysis has shown that both fundamental and nonfundamental factors seem to have played a role. Regarding fundamental factors, an accommodating U.S. monetary policy in light of a weak labor market as well as the rising U.S. current account deficit contributed to weakening the U.S. dollar and thus strengthening the euro. The Bank of Japan's large intervention purchases of U.S. dollars, which have been widely considered important in the economic policy debate, do not appear to have had a significant impact on the EUR/USD exchange rate; however, they seem to have weakened the Japanese yen both vis-a-vis the U.S. dollar and the euro. In addition to these factors, the accounting scandals in the U.S. stock markets as well as fears of war and terrorism had a dampening effect on market sentiment, thus adding to the strain on the U.S. dollar. Measurement problems render it difficult to assess the role of euro area monetary policy and of European economic data. With a view to nonfundamental factors, we discuss the role of the trend-following behavior of agents in the foreign exchange market on the basis of a technical foreign exchange trading system used in practice. The buy and sell recommendations of such systems may also help explain the appreciation of the euro in the period in question. All in all, these fundamental and nonfundamental factors may explain the direction to which the EUR/USD exchange rate moved, but not the extent of this movement or the relative significance of these factors in determining the EUR/USD exchange rate in the period in question. en Exchange rates Mar 31, 2005, 12:00:00 AM

• The International Monetary Fund's Balance Sheet Approach to Financial Crisis Prevention an Resolution (PDF, 287 kB) Hofer. Hofer In 2002, the International Monetary Fund added the Balance Sheet Approach to its set of instruments for monitoring member countries as well as the international financial system and for preventing and resolving financial crises. In this approach, which was predominantly conceived for emerging market economies, the IMF assumes that a country's vulnerability to financial crises depends in part on the financial structure of its sectoral balance sheets. With this instrument, the IMF analyzes the size and the composition of financial assets and liabilities in a country's aggregate balance sheet and its most important sectoral balance sheets (government, banks, corporations and households as well as the rest of the world). The IMF finds indicators of a country's vulnerability to crises by detecting imbalances in its maturity and currency matching, capital structure and solvency. This makes a valuable contribution to crisis prevention and helps to determine the necessary economic policy measures and external financing needs once a financial crisis has emerged. The IMF already employs this approach in its analyses and also plans to use it routinely in future Article IV consultations. en IMF, Balance Sheet Mar 31, 2005, 12:00:00 AM

• Company Taxation in an Enlarged European Union (PDF, 130 kB) Köhler-Töglhofer, Schratzenstaller, Wagener. Köhler-Töglhofer, Schratzenstaller, Wagener – Monetary Policy and the Economy Q1/05 The Oesterreichische Nationalbank (OeNB), the Austrian Institute of Economic Research (WIFO) and the University of Vienna organized a full-day workshop on Capital Taxation after EU Enlargement, which was hosted by the OeNB on January 21, 2005. en Company taxation Mar 31, 2005, 12:00:00 AM