Interest Rate Cuts in the Euro Area. Macroeconomic Effects in the EU and in Austria

Fritz Breuss and Andrea Weber ()
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Fritz Breuss: WIFO

WIFO Monatsberichte (monthly reports), 1999, vol. 72, issue 5, pages 335-340

Abstract: On April 9, the European Central Bank reduced interest rates by half a percentage point; this was the first interest rate cut since the launch of the euro. Several model simulations were carried out for the euro area and for Austria, under the assumption that short-term interest rates will remain at the lower level for two years. Simulations with the OEF model show that this interest rate cut results in higher economic activity in the form of an increase in real GDP by 0.18 percent in 1999 and 0.33 percent in 2000 for the euro zone. The expansionary monetary policy also results in an acceleration of inflation. The rate of inflation in the euro zone rises by about ¼ percentage point after two years. For Austria, the WIFO model was used to simulate three scenarios, which differ in the way the interest rate reductions in the euro zone are passed through to interest rates in Austria. The first scenario deals only with economic impulses on the Austrian economy resulting from the rise in real GDP in the euro area. Higher exports and investment boost GDP by 0.17 percent (1999) and 0.34 percent (2000). The rise in import prices triggers a slight price increase. The two other scenarios consider also the effects of a reduction in long-term interest rates (prime rate) by half or the full extent of the cut implemented by the ECB. This is likely to strengthen investment demand, but the stimulus to real GDP should remain relatively weak because of a rise in imports. In sum, the model simulations show that the ECB's first reduction in interest rates may help to improve the business climate in Europe but is unlikely to provide a hefty stimulus to economic activity in Europe.

Keywords: Zinssenkung in der Euro-Zone. Gesamtwirtschaftliche Auswirkungen in der EU und in Österreich; Interest Rate Cuts in the Euro Area. Macroeconomic Effects in the EU and in Austria (search for similar items in EconPapers)

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