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Is Germany’s Influence on Austria Waning?

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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.

Suggested Citation

  • Gerhard Fenz & Martin Schneider, 2006. "Is Germany’s Influence on Austria Waning?," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 24-45.
    • Handle: RePEc:onb:oenbmp:y:2006:i:2:b:2
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    File URL: https://www.oenb.at/dam/jcr:753533db-7d46-48d0-b619-7179e2dd239c/mop_2006_2_02_tcm16-45582.pdf
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    References listed on IDEAS

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    1. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
    2. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
    3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    4. Canova, Fabio & de Nicolo, Gianni, 2003. "On the sources of business cycles in the G-7," Journal of International Economics, Elsevier, vol. 59(1), pages 77-100, January.
    5. Fabio Canova, 2005. "The transmission of US shocks to Latin America," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 229-251.
    6. Hochreiter, Eduard & Winckler, Georg, 1995. "The advantages of tying Austria's hands: The success of the hard currency strategy," European Journal of Political Economy, Elsevier, vol. 11(1), pages 83-111, March.
    7. Yin-Wong Cheung & Frank Westermann, 1999. "An analysis of German effects on the Austrian business cycle," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(3), pages 522-531, September.
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    Cited by:

    1. Andreas Brunhart, 2015. "The Swiss Business Cycle and the Lead of Small Neighbor Liechtenstein," Arbeitspapiere 51, Liechtenstein-Institut.
    2. repec:onb:oenbwp:y::i:137:b:1 is not listed on IDEAS

    More about this item

    Keywords

    business-cycle; synchronization; vector autoregression; shock-identification; transmission.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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