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Is Germany’s Influence on Austria Waning? Synchronization and Transmission of Cyclical Shocks

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Author Info
Gerhard Fenz () (Oesterreichische Nationalbank)
Martin Schneider () (Oesterreichische Nationalbank)
Abstract

This study analyzes the connection between business cycle fluctuations in Germany and Austria as well as the transmission of German shocks to Austria. Compared to Austria’s links with other countries, the ties between Austria and Germany have loosened in relative terms in recent years; in terms of gross domestic product (GDP), however, a strong and steady increase has been recorded. Static and dynamic correlation measures point to a consistently high level of co-movement between Austria and Germany. While the Austrian economy lagged behind the German economy by one quarter in the 1970s, it now leads the German economy by one quarter. The Austrian economy’s reaction to German shocks equals 0.4 times the German reaction. Monetary policy shocks are transmitted with the greatest impact, while supply and demand shocks trigger a far less pronounced reaction in Austria. Over time, monetary policy shocks have gained slightly in importance, while German demand shocks have become less important. On average across shocks, the transmission effect shows a marginal weakening. The relative importance of Germany and the international environment in explaining the forecast error for Austrian GDP has increased somewhat over time, whereas the domestic contribution to the forecast error has declined. On the whole, it is not possible to identify a decline in Germany’s importance for the Austrian economy. JEL classification: C32, E32, F41

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Publisher Info
Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy and the Economy.

Volume (Year): (2006)
Issue (Month): 2 (August 2006)
Pages: 24-45
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Handle: RePEc:onb:oenbmp:y:2006:i:2:b:2

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Related research
Keywords: business-cycle synchronization vector autoregression shock-identification transmission.

References listed on IDEAS
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  1. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January. [Downloadable!] (restricted)
  2. Eduard HOCHREITER & Georg WINCKLER, 1993. "The Advantages of Tying Austria's Hands: The Success of the Hard Currency Strategy," Vienna Economics Papers vie9307, University of Vienna, Department of Economics.
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  3. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings, Federal Reserve Bank of Kansas City, pages 9-56. [Downloadable!]
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Canova, Fabio, 2003. "The Transmission of US Shocks to Latin America," CEPR Discussion Papers 3963, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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