Bank of Lithuania
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No 85
2021-01-11

What Explains Excess Trade Persistence? A Theory of Habits in the Supply Chains

  • Abstract

    International trade flows are volatile, imbalanced, and fragmented across off-shored supply chains. Yet, not much is known about the mechanism through which trade flows adjust in response to shocks over time. This paper derives a dynamic gravity equation from a theory of habits in the supply chains that generates autocorrelated bilateral trade flows that are heterogeneous across different country pairs. We estimate our version of the dynamic gravity equation for 39 countries over the period of 1950-2014 and find that the transmission of local and global trade shocks is fundamentally different. We show that the trade persistence coefficient falls from 0.91 to 0.35 when we depart from the existing empirical gravity models that draw inference from the pooled coefficient estimates without controlling for the variation in the unobservable global factors. Thus, our approach escapes the excess trade persistence puzzle and adds to the explanation of the sharp decline and the rapid recovery of the global trade flows during the "Great Trade Collapse" of 2008-09. In addition to the traditional variables in the gravity equation, we also show that a cross-country habit asymmetry creates bilateral and multilateral trade imbalances, which are an important determinant of bilateral trade flows both theoretically and empirically.

    Keywords: Dynamic Gravity Equation; Habits; Trade Persistence; Trade Imbalance; Global Shocks; Parameter Heterogeneity.                                                                                                                                                                   
    JEL codes: C23, F14, F41, F62.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.
     

No 83
2020-12-29

Exchange rate fluctuations and the financial channel in emerging economies

  • Abstract

    This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyse whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks transmission covering 11 emerging market countries for the period 2000Q1-2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand with regard to foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to appreciation) decreases GDP. The financial channel works mostly in the short-run except for Brazil, Malaysia and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rates.

    Keywords: emerging markets, financial channel, exchange rates, global liquidity.

    JEL Codes: F31, F41, F43, G15.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 22
2020-10-21

An analysis of investments and their drivers in Lithuania

  • Abstract

    The article analyzes recent developments in investments in Lithuania using a broad set of possible drivers, including EU funds. We apply a Bayesian VAR setup with data from 1997Q1 to 2019Q4. We also examine and compare business vs. government investments and different types of investments, especially innovative investments. We find that total investments are basically driven by the data on business investments. The main outcomes are mostly in line with the literature, but we do see some crucial differences across types. Key results include: (1) a small role for lending rates as compared to other factors, largely limited to the global financial crisis; (2) the crucial role of demand-side variables, i.e. foreign demand or private consumption; (3) pro-cyclicality in government investments and a positive correlation with business investments; (4) the importance of uncertainty for some sectors, that positively drives only the more innovative/intangible investments; and (5) despite the fact that EU funds do feed investments, there is a crowding-out in the short run for business-related investments, while there is some positive contribution to public investments.

     

    JEL Codes: E32, D24, D61, C32.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 21
2020-07-22

The persistently high rate of suicide in Lithuania: an updated view

  • Abstract

    This article examines possible factors related to the rate of suicide in Lithuania, which is the highest in Europe and one of the highest worldwide. Using statistical methods, we select possible determinants from the literature in the fields of economics, psychology and sociology. We look at annual data from 1994 to 2016 for the Baltic States, with a specific focus on Lithuania. The main factors linked to suicide in the region seem to be GDP growth, demographics, alcohol consumption, psychological factors and global warming. For Lithuania in particular, other macroeconomic variables (especially linked to the labor market) may matter. The percentage of rural population does not seem to be a key robust factor.

    JEL Codes: I15, I31, J11, J17, O15.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 75
2020-03-26

Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs

  • Abstract

    In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.

    JEL Codes: E31, F31, F45.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 74
2020-03-13

Assessing credit gaps in CESEE based on levels justified by fundamentals – a comparison across different estimation approaches

  • Abstract

    Also published in the Oesterreichische Nationalbank Working Paper Series, no. 229/2020.


    Relying on a rich panel regression framework, we study the role of different “fundamental” credit determinants in Central, Eastern and Southeastern European (CESEE) EU Member States and compare actual private sector credit-to-GDP ratios to the derived fundamental levels. It turns out that countries featuring positive credit gaps at the start of the global financial crisis (GFC) have managed to adjust their credit ratios downward toward levels justified by fundamentals, but the adjustment is apparently not yet complete in all countries. In addition, negative credit gaps have emerged or widened in most countries that had seen credit levels close to or below the fundamental levels of credit at the start of the GFC. The estimated speed of adjustment implies that at the end of the review period, there was still a rather long way to go for countries with very large credit gaps.

    JEL Codes: C33, E44, E51, G01, G21, O16.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 31
2020-01-21

The Challenges of Lithuania’s Economic Convergence and Labour Market

  • Abstract

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.


    Available only in Lithuanian

     

No 70
2019-12-27

Who did it? A European Detective Story. Was it Real, Financial, Monetary and/or Institutional: Tracking Growth in the Euro Area with an Atheoretical Tool

  • Abstract

    During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth.

    JEL Codes: C23, E40, F33, F43.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 17
2019-12-13

Convergence and growth decomposition: an analysis on Lithuania

  • Abstract

    We study the behaviour of Lithuania relative to other 25 EU countries, looking specifically at convergence in terms of GDP per capita and its growth accounting components: capital accumulation, labour and its subcomponents, i.e. participation and employment, and the Total Factor Productivity (TFP). We find that Lithuanian Real GDP per capita shows indeed a convergence path similar to the other Baltic States and they all belong to the second club (includes part of the periphery and the other new member states). The convergence paths of labour or capital accumulation do not seem significantly different compared to the ones of other EU members. The Lithuanian transition path in TFP has become plateau after the crisis but this is seemingly not a divergence factor. Two components show noticeable changes in behaviour after 2010: the growth in total factor productivity (TFP) considerably slows down, and the employment-population ratio appears to increase accounting for around one third of the annual GDP growth in Lithuania. In addition, we explore several transition scenarios for Lithuania to the EU-25 average.

    JEL Codes: O47, F15, F45.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 13
2019-08-08

An investigation of the Exchange Rate Pass-Through in the Baltic states

  • Abstract

    In this paper, we investigate the Exchange Rate Pass-Through (ERPT) to import and consumer prices in the three Baltic states. We apply reduced form equations first. Then, to look at measures of shock-dependent ERPT, we use Bayesian VARs with zero and sign restrictions and a local projection exercise, using common euro area shocks. We find that results from reduced form equations are in line with the ERPT literature. As for shock-dependent ERPTs, the magnitudes are overall bigger than in the literature in the case of import prices. They get smaller for consumer prices and even smaller if we remove energy and food prices.

    JEL Codes: E31, F3, F41.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 62
2019-06-20

An empirical investigation of the relationship between trade and structural change

  • Abstract

    This paper investigates the role of international trade in the increase in the employment share of non-tradable sectors (services and construction). Borrowing insights from the vast theoretical literature on the determinants of structural change, we build an empirical model allowing to distinguish between long-run and short-run effects. We use this model to investigate the relative importance of the main traditional demand-side and supply-side channels of structural change, assessing, in this context, the role of trade variables. To this end, we use an unbalanced panel of countries for the period 1960-2011 from the EU-KLEMS and the GGDC 10-sector databases. Our preliminary results suggest that both Engelian income effects, i.e. the so-called demand-side drivers, and relative productivity, i.e. the supply-side channel, are relevant drivers of structural change. We show that the import and export shares are positively and negatively related, respectively, with the employment shifts to non-tradable sectors in the long run, in particular, for mature and transition economies. In the short run, a positive and significant relationship between the import share and structural shifts towards tradable sectors emerges. 

    JEL Codes: F1, F4, O1, O4.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 10
2019-01-15

Real Effective Exchange Rates determinants and growth: lessons from Italian regions

  • Abstract

    In this paper we analyse the price competitiveness of the Italian regions by computing the Real Effective Exchange Rate (REER) for each region, deflated by CPI and vis-à-vis the main partner countries. We use them to look for the medium-term determinants, finding significant heterogeneities in the role of government consumption and investment expenditure. Government consumption has an extremely negative effect on competitiveness in North-Eastern Italy, Southern Italy and Lazio. Investment plays a negative role especially in the North-West, while it can be positive for competitiveness in Lazio and Southern Italy. We also find that the transfer theory does not necessarily hold and it even behaves in the opposite direction in case of North-Eastern Italy and Lazio. Lastly, we show that an increase in the regional price competitiveness influences regional growth positively only in the long run and spillovers may play a role.

    JEL Codes: E62, F31, F41, R11.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

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