East German Economy: Demand Push Stronger than Structural Deficiencies
Wirtschaft im Wandel,
No. 7,
2007
Abstract
In 2006, growth of production was surprisingly strong in Eastern Germany. The structural deficiencies there would have suggested a slower pace. In particular, linkages with national and international business cycles have been underestimated. To a large part, the reason why output grew by 3 per cent did not come from Eastern Germany itself, but from the Old Länder and from abroad. In the New Länder, the strong upward swing in investment activity stimulated the economy. However, owing to a small increase in total income of private households, their purchasing power lagged behind.
The improved ability of East German firms to absorb cyclical impulses from exports and from Germany’s general investment activity proved to be a crucial factor. In particular, the endowment of workplaces with modern production facilities as well as the continued reduction in the disadvantages with respect to cost-competitiveness in the tradable goods sector were beneficial. The labour cost advantage compared to West German competitors increased further while the disadvantage compared to those from Central and Eastern Europe decreased.
Benefiting from these factors, economic activity in Eastern Germany will grow faster than in the Old Länder as long as the upswing in Germany and abroad remains strong. In 2007 and 2008, investments – especially in equipment – and exports will be the driving forces again. For exports, the strongly expanding markets in Central and Eastern Europe as well as in Russia will gain in importance. As income and employment prospects improve, private consumption will support the growth in production. Registered unemployment should decrease below the 1-million threshold.
Manufacturing will remain the primary force of the upswing; its advantages in production costs will not vanish as long as, even in presence of scarcity of skilled labour, salaries and wages do not increase more than in Western Germany. In the wake of robust economic growth, the New Länder will make further progress in catching up with respect to production and income.
Companies will regain support from the banking industry. Yet, investment capital still stems from public funding programmes to a non-negligible extent. In the medium run, access to credit will ease as a result of further improvements in the firms’ net worth position. However, dependency on internal funds remains high and exposes companies to comparatively strong cyclical risks. In an economic downturn, the structural deficiencies of the East German economy will impair economic expansion.
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asset price inflation
Tobias Knedlik, A. Knorr
Systeme monetärer Steuerung - Analyse und Vergleich geldpolitischer Strategien - Schriften zu Ordnungsfragen der Wirtschaft, Band 86,
No. 86,
2007
Abstract
Most of the influential central banks managed to bring inflation down to a sustainable path in the last two decades. However, during the same time asset prices increased significantly. From the perspective of economic policy, this development might constitute a problem in the case that price increases are not due to changes in fundamentals but are of a speculative nature. During the current past the number of asset price bubbles increased. The aim of this contribution is to analyze policy options with regard to asset price inflation. We identify the relevant markets, discuss their specific price mechanisms, discuss transmission mechanisms, and the usefulness of monetary policy and alternative instruments to deal with asset price inflation. We show that, once asset price inflation is present, monetary policy can do little to stop processes of speculative bubbles. It is the more important that that alternatives are considered. These include the analysis of monetary conditions, a straight forward communication, better regulation, and a strengthening of institutions that allow for diversifying risks to handle the necessary structural changes with lowest possible economic costs.
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Geldpolitische Strategien im Umbruch
Diemo Dietrich, Albrecht F. Michler
Systeme monetärer Steuerung - Analyse und Vergleich geldpolitischer Strategien. Schriften zu Ordnungsfragen der Wirtschaft, Band 86,
No. 86,
2007
Abstract
In recent times the strategies of monetary policy, in particular that of the ECB, have been in the limelight of both scientific and public attention. After introducing into conceptual basics of monetary policy strategies, we compare inflation targeting and monetary targeting as the two prevalent strategies. The criteria established for this comparison are the way how the transmission of monetary policy is modeled, the role of expectations, the meaning of a nominal anchor as well as transparency and accountability. We conclude with a critical appraisal of the current ECB strategy.
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Die Lage der Weltwirtschaft und der deutschen Wirtschaft im Frühjahr 2007
Wirtschaft im Wandel,
1. Sonderausgabe
2007
Abstract
In spring 2007, the global economy remains robust. While growth rates have declined slightly from last year, as business activity in the US has slowed, they continue to reflect an upswing, which by now has held on for a notably long time. Especially the developing and emerging countries have been raising output very fast, due in part to their increasing role in the international division of labour. In the industrialised economies, on the other hand, the current recovery has not been remarkably strong. So far the slowdown in the US economy has not spilled over to other regions and the Euro Area as well as Japan continue to expand at a high pace. Here expansive monetary policy provided a notable support. Buoyant financial markets stimulated the world economy additionally, even though market volatility has increased since the end of February. The US central bank’s current concern with inflationary risks keeps it from loosening its slightly restrictive monetary policy. It will be the second half of the year – when price pressures have eased – until the Fed makes its first rate cut. The ECB, on the other hand, has been preparing financial markets for a further increase in interest rates by summer. In 2007 and 2008 the growth disparities in the industrialised countries will diminish. On one hand, the upswing in the Euro Area will start to moderate, as fiscal policy hampers business activity and monetary policy will not stimulate anymore. On the other hand, the US economy will slowly gain pace from summer onwards; the emerging markets will continue to develop in a highly dynamic fashion. World-GDP in this and next year will likely rise by about 3 ¼ % in 2007, which is still faster than in the average of the last ten years. World trade will rise by 7 ½ % in the coming two years. An oil price of 65 US-Dollar and an exchange rate between the Euro and the US-Dollar of 1.32 were assumed for both years 2007 and 2008. The real estate market in the USA continues to be a risk for...
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Implementing an International Lender of Last Resort
Tobias Knedlik
IWH Discussion Papers,
No. 20,
2006
Abstract
Current research discusses various general frameworks for installing an international lender of last resort (ILOLR). However, it remains unclear how the ILOLR should actually operate. This paper discusses six different options of construction of an ILOLR who supports central banks in the case of currency crises. The paper concludes that the cost efficient version of the ILOLR would be direct interventions by the IMF by the use of IMF resources and the right to dispose additional reserves from central banks. The paper considers measures of cost efficiency, such as cost of borrowing, intervention, and sterilization and moral hazard problems.
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The IWH signals approach: the present potential for a financial crisis in selected Central and East European countries and Turkey
Hubert Gabrisch, Simone Lösel
Wirtschaft im Wandel,
No. 8,
2006
Abstract
The steep increase of oil prices, general threats rooting from Iran’s nuclear program, and doubts about the future policy of important central banks recently caused more uncertainties of investors on international financial markets. This explains the higher volatility and the fall of indices on stock markets including those of some Central and East European countries. International investors could respond with adjustments of their portfolio and trigger off a financial crisis. On this background, the article studies the potential for a financial crises in the region mentioned. The analytical tool is the IWH signals approach. The study concludes that the risk of the outbreak of a financial crisis within the next 18 months is rather unrealistic in most countries. A stable economic policy, high real growth rates, a financial system already robust compared to earlier times of transition, and appropriate exchange rate arrangements protect the countries against speculative attacks and portfolio adjustments. When the composite indicator shows deterioration like in the Baltic countries, it turned out to be negligible. For the Slovak Republic and Slovenia, the composite indicator even improved. A closer look to individual indicators reveals still some problems in the banking sectors of the Czech Republic, Poland, and Hungary, however, without out major impact on the composite indicator.
This general assessment does not apply to Romania, and, in particular, to Turkey. The composite indicator signals a significant increase of the risk potential for the next 18 months in both countries. There is a considerable need for sound policy action.
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Does Transparency of Central Banks produce Multiple Equilibria on Currency Markets?
Axel Lindner
Scandinavian Journal of Economics,
No. 1,
2006
Abstract
A recent strand of literature shows that multiple equilibria in models of markets for pegged currencies vanish if there is slightly diverse information among traders; see Morris and Shin (2001). It is known that this approach works only if the common knowledge in the market is not too precise. This has led to the conclusion that central banks should try to avoid making their information common knowledge. We develop a model in which more transparency of the central bank implies better private information, because each trader utilises public information according to her own private information. Thus, transparency makes multiple equilibria less likely.
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Technological capability of foreign and West German investors in East Germany
Jutta Günther
IWH Discussion Papers,
No. 189,
2004
Abstract
Foreign direct investment (FDI) plays an important role for countries or regions in the process of economic catching-up since it is assumed – among other things – that FDI brings in new production technology and knowledge. This paper gives an overview about the development of FDI in East Germany based on official data provided by the Federal Bank of Germany. The investigation also includes a comparison of FDI in East Germany to Central East European countries. But the main focus of the paper is an analysis of the technological capability comparing majority foreign and West German owned firms to majority East German owned firms. It shows that foreign and West German subsidiaries in East Germany are indeed characterized by superior technological capability with respect to all indicators looked at (product innovation, research & development, organizational changes etc.).
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Why do we have an interbank money market?
Jürgen Wiemers, Ulrike Neyer
IWH Discussion Papers,
No. 182,
2003
Abstract
The interbank money market plays a key role in the execution of monetary policy. Hence, it is important to know the functioning of this market and the determinants of the interbank money market rate. In this paper, we develop an interbank money market model with a heterogeneous banking sector. We show that besides for balancing daily liquidity fluctuations banks participate in the interbank market because they have different marginal costs of obtaining funds from the central bank. In the euro area, which we refer to, these cost differences occur because banks have different marginal cost of collateral which they need to hold to obtain funds from the central bank. Banks with relatively low marginal costs act as intermediaries between the central bank and banks with relatively high marginal costs. The necessary positive spread between the interbank market rate and the central bank rate is determined by transaction costs and credit risk in the interbank market, total liquidity needs of the banking sector, costs of obtaining funds from the central bank, and the distribution of the latter across banks.
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On the stability of the banking systems in the Czech Republic, Poland and Hungary
Werner Gnoth
Wirtschaft im Wandel,
No. 11,
2003
Abstract
The EU countries are interested in stable banking systems of candidate countries, because any kind of instability of the financial sector could have serious consequences to the financial and exchange rate system of the whole Community. In the article the state of stability of the banking systems is analyzed, based on several important indicators. At present the banking systems of candidate countries still look fairly stable: weak competition among the banks, a high inflation rate and a low intermediation rate in terms of total assets / GDP have enabled banks still to reach a sufficient net interest yield. So they have been able to stand a relatively high share of non- performing loans and also a relatively high amount of foreign exchange indebtedness. In order to ensure a problem-free integration of the banking systems of the candidate countries in the EU they must still meet several conditions. They need to widen and refine the supply of services and to lower the share of non-performing loans, mainly in the Czech Republic and Poland. The foreign exchange indebtedness of the banking and enterprises domains in Poland and Hungary needs to be restricted. Successful integration in EU competition requires in general increase in the banks own capital.
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