Monetary Policy and the Economy Q1/07

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Studies and Analyses

• Editorial (PDF, 76 kB) Christl, Duchatczek, Gnan, Liebscher, Mooslechner. Liebscher, Duchatczek, Christl, Mooslechner, Gnan – Monetary Policy and the Economy Q1/07 en

• Euro Area Growth Broad-Based in Early 2006 (PDF, 188 kB) Fenz, Schreiner, Silgoner. Fenz, Schreiner, Silgoner – Monetary Policy and the Economy Q1/07 The global economy continued to look robust at end-2006. In the U.S.A. private consumption increased, notwithstanding the protracted housing slowdown, and the services sector continued to grow at a dynamic pace. In view of the still buoyant economy, a cut in U.S. interest rates does not appear imminent. In Japan, the economic recovery persisted, leading the Bank of Japan to raise interest rates in February 2007 – for the first time since ending six years of zero interest rates in July 2006. In China and Southeast Asia, the rapid pace of growth continued to accelerate. In the euro area, real GDP growth accelerated in the fourth quarter of 2006 and is, moreover, increasingly being driven by domestic demand. The latest forecasts indicate above-potential GDP growth in 2007. Furthermore, the labor market developed favorably, with both the actual and structural unemployment rate down by a significant margin. Since September 2006, the rate of inflation has been below the 2% mark owing to, among other factors, the fall in crude oil prices and the hitherto weak pass-through of the increase in Germany’s VAT rate to consumer prices. In this climate the short-term prospects for price stability have improved as well. en economic developments, global outlook, euro area, central and (south-)eastern Europe, Austria. E200, E300, O100 2007?string-4

• Euro Cash in Austria Five Years after Its Introduction – What the Public Thinks (PDF, 273 kB) Fluch, Gnan, Schlögl. Fluch, Gnan, Schlögl – Monetary Policy and the Economy Q1/07 This paper analyzes Austrian and euro area opinion polls to assess the Austrian public’s views about the single currency five years after the introduction of euro cash. The analysis focuses on the following questions: How are Austrians managing with the euro now? How do Austrians assess the opportunities the euro offers? How did the Oesterreichische Nationalbank (OeNB) and other institutions cope with the communication policy challenges involved in the introduction of the euro? How good a feel have people developed for euro prices? How happy are Austrians with the euro compared with people in other euro area countries? The survey results show that the euro is recognized as a stable currency; it fulfills Austrians’ demand for price stability. People have largely overcome whatever problems they had using the euro in day-to-day transactions initially. The overwhelming majority of people are aware of the advantages the euro has for the economy and for them personally. People’s perception of the value of euro prices is getting better by the year; euro cash is widely accepted. The OeNB’s activities have contributed substantially to the positive attitude toward the euro. A final remaining challenge is the need to dispel the mistaken impression that the euro has contributed to price increases. Other empirical evidence corroborates the widely held belief that the euro has resulted in only a limited degree of price convergence in the euro area. en Euro introduction, assessment, Austria, opinion polls, information measures. E52 2007?string-4

• The Development of Euro Prices – Subjective Perception and Empirical Facts (PDF, 316 kB) Fluch, Stix. Fluch, Stix – Monetary Policy and the Economy Q1/07 This study compares consumers’ subjective price perceptions with official inflation data for the period from the euro cash changeover in 2002 to 2006. At an annual average of 1.7%, the overall rate of inflation has remained low over the past five years despite adverse effects exerted by external factors such as the marked increase in oil prices. In contrast, the prices of frequently purchased consumer goods and services, which people commonly use as price benchmarks, experienced an upward drift. This effect has been potentiated by psychological factors, e.g. price increases tend to fix themselves more firmly in people’s minds than price reductions (of which there have also been a considerable number). In addition, some groups within the population have yet to develop sufficiently firm value perceptions in euro and stop converting euro prices into schilling. Mentally comparing current euro prices with schilling prices that are more than five years old simply distorts the perception of inflation. Yet survey data show that consumers’ value perception is continually improving. The subjective impression of euro-induced inflation has therefore tended to lessen, and by the end of 2006, it was considerably lower than when euro cash was initially introduced. These developments give rise to the hope that people have largely overcome their impression of a “euro price shock” and that headline inflation and perceived inflation will again develop largely in concert in the future. This trend could be encouraged by increasing efforts to communicate price developments to the public. en Austria, euro prices, inflation, perceived inflation E31 2007?string-4

• Price Setting in Austria before and after the Euro Cash Changeover: Has Anything Changed in the Last Five Years? (PDF, 183 kB) Glatzer, Rumler. Glatzer, Rumler – Monetary Policy and the Economy Q1/07 This study addresses the question of whether the price adjustment process in Austria has changed since the changeover to euro notes and coins at the beginning of 2002. For this purpose, we analyze the frequency and size of price adjustments, sectoral and seasonal differences as well as the structure of prices (notably the share of attractive prices) on the basis of micro price observations underlying the Austrian Consumer Price Index (CPI). A data set spanning the period from 1996 to mid-2006 was used for the analysis. In addition to confirming known results from previous studies – i.e. that price adjustments occur roughly once per year on average, but with strong sectoral differences – our study reveals an unchanged seasonal pattern of price adjustments, with major peaks in January, also after the cash changeover. At the time of the changeover itself, the observed price changes were more frequent but smaller than usual. As upward and downward price adjustments were also roughly balanced, the cash changeover appears to have had no significant overall inflationary effects, confirming previous studies. The share of attractive prices (i.e. prices ending in 9 or 90, and even prices), which was over 60% before the cash changeover, plummeted to just over 20% in early 2002. In the course of the ensuing three to four years, however, this share again approached the level observed prior to the transition. From these results we conclude that price-setting habits as well as the structure of Austrian consumer prices has not changed significantly since the cash changeover. en Consumer prices, frequency and size of price changes, attractive prices. E31, D40, D21 2007?string-4

• Price Level Convergence in Europe: Did the Introduction of the Euro Matter? (PDF, 246 kB) Cuaresma, Égert, Silgoner. Cuaresma, Balázs Égert, Silgoner – Monetary Policy and the Economy Q1/07 Abstract:Several theoretical arguments suggest that price level divergence across EU countries has diminished in the course of the European integration process as a result of both product market integration and the introduction of the common currency. In this paper, we empirically assess this hypothesis for the euro area countries and a group of control countries since 1990, using price level data on over 160 products and services in 27 European cities. Our conclusions confirm that price convergence took place at the beginning of the 1990s. There is, however, not much evidence that the introduction of the single currency has led to a further narrowing of price differentials. In fact, price dispersion has remained remarkably stable in recent years, whereas it has increased slightly since 2003 in the control group. en price level convergence, euro area, euro. F31 2007?string-4

• The Euro on the Road East: Cash, Savings and Loans (PDF, 171 kB) Backé, Ritzberger-Grünwald, Stix. Backé, Ritzberger-Grünwald, Stix – Monetary Policy and the Economy Q1/07 The euro is already present throughout Central, Eastern and Southeastern Europe today. Against this backdrop, the OeNB has been regularly conducting household opinion polls for years in the countries that make up this economic space. The survey questions place special emphasis on euro cash holdings. The results show that the choice to hold euro cash is based on a wide variety of motives, above all geographic proximity, coupled with increasing economic interlinkages, the desire to minimize risk, and tradition. Decisions to have savings in euro or to take out euro-denominated loans can be attributed to similar considerations. In addition, macroeconomic factors such as inflation and exchange rate expectations may also play a role. What clearly emerges is that the extent of currency substitution varies considerably from country to country. In terms of cash, Slovenia, which was about to adopt the euro at the time of the most recent poll, is the frontrunner (approximately 40% of the population reported euro cash holdings in the second half of 2006). Hungary is last, with only a 7% rate. In terms of savings and loans, Croatia posts the highest percentage according to both the OeNB survey and the aggregated bank balance sheet data (approximately 80% of all savings deposits and/or borrowings of households and enterprises are denominated in foreign currency). At the opposite end of the spectrum is the Czech Republic, a country with approximately 10% in both areas. en currency substitution, demand for euro. E41, E50, O14 2007?string-4

• Austria’s Experience with Euro Migration since the Cash Changeover (PDF, 143 kB) Schneeberger, Süß. Schneeberger, Süß – Monetary Policy and the Economy Q1/07 The introduction of the euro in 2002 offered a unique opportunity to learn more about the patterns and structures of cross-border cash movements. The Oesterreichische Nationalbank (OeNB) has carried out various surveys to analyze the migration of cash in greater depth. This article presents the results of two surveys, which demonstrate that cash is very mobile. An Austrian wallet will typically hold coins and banknotes from almost all euro area countries. Euro coins minted in countries other than Austria are readily discernible, as all coins have a common European face and a distinct national face. For euro banknotes, closer inspection is required, as only the letter contained in the banknote’s number betrays the country of origin. Surveys on cash migration show that the volume of euro banknotes and coins in circulation in Austria, as well as the mix of denominations, remained relatively stable at Austrian households from 2002 to 2004, albeit with a slight increase in the share of foreign banknotes and coins. In Austria, migration continues to generate an influx of banknotes. In particular, EUR 50, EUR 20 and EUR 5 banknotes exhibit a high degree of migration. The results of the two OeNB surveys clearly reveal that banknote migration took place at a considerably faster pace than coin migration. This brief study calculates migration factors for individual countries in order to explain the migration taking place. These factors throw light on whether a country is one of cash emigration or one of cash immigration, while falling short of offering a clear explanation for the underlying reasons of migration. en cash, migration, cross-border cash flows. E51 2007?string-4

• Cash Logistics in Austria and the Euro Area (PDF, 146 kB) Schautzer. Schautzer – Monetary Policy and the Economy Q1/07 Five years of euro banknotes and coins also means five years of experience with crossborder cash logistics. A total of 11.3 billion euro banknotes valued at EUR 628.2 billion are currently in circulation. Handling this enormous amount of cash involves numerous tasks for the national central banks (NCBs) of euro area countries. For example, NCBs must put banknotes and coins into circulation, monitor cash in circulation and its quality, manage the cash cycle and ensure the public’s trust in the currency. These tasks are coordinated by the ECB and implemented at the national level. Within the Eurosystem, the OeNB has established itself as a competence center for cash logistics. In particular, the OeNB’s organization of the cash cycle based on close cooperation between the central bank and commercial banks in a public-private partnership model has earned worldwide recognition. In 2006, a total of 1.2 billion banknotes and 1.7 billion coins were handled (i.e. checked for fitness and prepared for circulation) in Austria. These quantities clearly illustrate the scope of the underlying efforts and at the same time highlight the need for an efficient organizational structure. The highest priority in this context is to ensure the public’s trust in the currency. For this purpose, it is important to continue developing cash as a product in the future, to invest in the security of cash as a means of payment, and to ensure a high-quality cash supply at the European level. en cash, cash logistics, banknote and coin production, cash in circulation, cash hub. E51 2007?string-4

• Euro Banknotes in Circulation and the Allocation of Monetary Income within the Eurosystem (PDF, 171 kB) Handig, Holzfeind. Handig, Holzfeind – Monetary Policy and the Economy Q1/07 Banknotes in circulation are traditionally the most important liability item in the balance sheet of central banks. The launch of euro cash created the need to treat this item in new way to reflect the joint liability of all Eurosystem members – the ECB and all national central banks (NCBs) of the euro area – for euro banknotes. In this context, the implications of banknote migration expected both within and outside the euro area, as well as its potential impact on the distribution of profits among the euro area central banks, were subject to extensive discussions already before the cash changeover. A major challenge for the Eurosystem has been the fair allocation of monetary income. This is the income accruing to the individual NCBs in the performance of their monetary policy functions. In particular, this income – traditionally referred to as seigniorage income – includes income derived from assets held against notes in circulation and deposit liabilities to credit institutions. The experience of the first five years after the cash changeover shows that the combination of all relevant aspects of the Eurosystem’s banknote circulation and seigniorage income rules has ensured a fair allocation of monetary income, the functional integrity of the Eurosystem,2 and thus the fulfillment of the objective stipulated by Article 32 of the Statute of the European System of Central Banks3 (ESCB). en Seigniorage, monetary income, banknotes, liability base. E52, E58 2007?string-4