Bank of Lithuania
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All results 26
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.

No 24
2019-01-02

Euro Area growth and European institutional reforms

  • Abstract

    Euro area countries have experienced profound economic, financial and institutional changes over the last three decades. GDP growth has been very volatile, and very uneven, across countries. Which factors played a role in stirring growth and/or reducing it?  We provide an atheoretical toolkit looking at a large set of real, financial, monetary and institutional variables, as possible factors behind fluctuations and differences in growth rates among euro area countries since 1990. The main outcome stresses the key positive role for long-run growth of higher European institutional integration, overall and for the periphery in specific. This result is robust across specifications and setups. If we split the European institutional integration in its main components, we can see a significant positive role for financial and political integration in the long-run. However the first seems to have beneficial effects for the core only while the opposite holds for the political integration which influences positively the periphery.

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

No 15
2017-08-18

Synchronicity of real and financial cycles and structural characteristics in EU countries

  • Abstract

    In this paper, we examine the relationships between real, credit and house price cycles, by using a synchronicity index, and structural characteristics and macroeconomic variables of 17 EU countries. We find that the cycles between credit variables and the real cycle with the property or equity prices cycles seem relatively well synchronised. Credit and GDP fluctuations seem to be less synchronised, mostly because credit volumes tend to lag the real cycle by several quarters. The high rates of private homeownership tend to be associated with larger cycles in GDP, credit, and house prices. Higher Loan-To-Value ratios, seen as a proxy of borrowing constraints, and a higher percentage of flexiblerate mortgages, could also indicate that a country is more sensitive to shocks and possibly increase pro-cyclicality and increase cycle volatility. Finally, the pro-cyclicality of the credit and housing market to the GDP cycle can be linked to the fluctuation in current accounts and their misalignments with respect to the theoretical equilibrium value. The synchronicity and the cycles of credit may also be considered for signaling recessions.

    JEL Codes: E32, E44, F36.

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

No 40
2017-02-28

A panel VAR analysis of macro-financial imbalances in the EU

  • Abstract

    Also published in the ECB Working Paper Series


    We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

    JEL Codes: F32, F31, C33.

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

No 13
2017-02-24

Unconventional monetary policy: Interest rates and low inflation. A review of literature and methods

  • Abstract

    In this paper we provide an overview of the different approaches identified to capture monetary policy in a period of Zero Lower Bound (ZLB). We focus here on the methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis and different shadow rates.
    In the second section of this review we calculate these measures for the euro area and also draw comparisons among different approaches and look at the effects on main macroeconomic variables, with a special focus on inflation. The impact of unconventional monetary policy shocks on inflation is found to be significantly positive by the majority of the studies and by using different methods.
    Ultimately, we provide a summary of the literature on the Natural Real Rate of Interest, which may be useful for assessing how long low (real) interest rates in a ZLB may stay in place; also suggesting some possible improvement in the estimations which would lead to more accurate policy recommendations.

    JEL Codes: E43, E52, E58, F42.

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

No 38
2017-01-27

Exchange rate pass-through in the Euro Area

  • Abstract

    Also published in the ECB Working Paper Series


    In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.

    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 35
2016-11-02

The pass-through to consumer prices in CIS economies: the role of exchange rates, commodities and other common factors

  • Abstract

    Non-technical summary (23.7 KB )


    This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.

    JEL Codes: C38, E31, F31.

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

No 34
2016-10-28

Lithuania in the Euro Area: Transmission and macroprudential policies

  • Abstract

    Non-technical summary (26.5 KB )


    In this paper, we develop a two-country monetary union new Keynesian general equilibrium model with housing and collateral constraints, to be calibrated for Lithuania and the rest of the euro area. Within this setting, and following the recent entrance of Lithuania in the EMU, the aim of this paper is twofold. First, we study how shocks are transmitted differently in the two regions, considering the recent common monetary policy. Then, we analyze how macroprudential policies should be conducted in Lithuania, in the context of the EMU. As a macroprudential tool, we propose a decentralized Taylortype rule for the LTV which responds to national deviations in output and house prices. We find that, given the housing market features in Lithuania, common shocks are transmitted more strongly in this country than in the rest of the euro area. In terms of macroprudential policies, results show that the optimal policy in Lithuania with respect to the euro area may have a different intensity and that it delivers substantial benefits in terms of financial stability.

    JEL Codes: E32, E44, F36.

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

No 11
2016-08-09

A closer look at EU current accounts

  • Abstract

    In this paper, we look at the determinants of current accounts in twenty-seven EU countries over the period 1994-2014. The twenty-seven countries of interest are divided into three sub-groups, namely: core, periphery and CEE new member states. We also assess the current accounts based on computed equilibrium values, and we provide a measure of misalignment for the medium run. As determinants we include capital flows as well as demographic, fiscal and relative development factors. The initial Net Foreign Asset position and oil balance seem to matter more in the core countries than in the periphery and CEE new member states. In contrast, the periphery and CEE new member states seem to be more strongly affected by capital flows. Fiscal balance negatively affects only the periphery, while an increase in government spending is positive for the current account for CEE new member states. In the past twenty years these misalignments have shown a cyclical behaviour in most EU countries, and the magnitude of the cycles themselves are highly heterogeneous across groups. Lastly, we compute an adjusted current account equilibrium, which tries to correct the equilibrium value by the role of expectations (proxied by IMF projections). This factor has more of an impact in the UK than in the euro-area countries.

    JEL Codes: F32, F31, C33.

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

No 26
2016-05-05

Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in the EU

  • Abstract

    In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency.
    We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments.
    In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.

    JEL Codes: F31, F43, C23.

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

No 9
2015-11-17

Financial cycle measures for 41 countries: A new database

  • Abstract

    We built different financial cycle measures, also applied recently in Comunale and Hessel (2014).
    Our aim is to provide a comprehensive database with definitions of variables that may be of use for crosscountry comparative analysis.
    The database includes 41 countries (EU28 and OECD members) from 1994 to 2014 with both annual and quarterly frequency.
    The main contributions of our database are that: i) it is publicly available and freely downloadable from the website of the Bank of Lithuania and it can be used subject to a clear reference; ii) the data are updated to the most recent year/quarter available; ii) considers not only the EU members as of 2014 (Croatia is therefore included in the sample), but also other non-EU countries part of the OECD (including both advanced and developing economies); iii) is built using both HP filtering techniques and the Principal Component Analysis (PCA), the latter are used to compute synthetic indices, to come up to different applicable indicators; iv) we added also some business cycle measures for comparison reason.
    Ultimately, we show an application of our data, checking whether the financial cycle can influence the estimation of inflation in the euro area and what is the difference between adding a business or a financial cycle measure for the exchange rate pass-through (ERPT). We find that the ERPT can be higher in the presence of house price fluctuations at the frequency of the financial cycle. 

    JEL Codes: E32, E44, F36.

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

No 20
2015-09-24

Current account and REER misalignments in Central Eastern EU countries: an update using the macroeconomic balance approach

  • Abstract

    Following the IMF CGER methodology, we conduct an assessment of the current account and price competitiveness of the Central Eastern European Countries, CEECs, which joined the EU between 2004 and 2014. We present results for a method called the “Macroeconomic Balance (MB) approach” which provides a measure of current account equilibrium based on its determinants together with misalignments in the real effective exchange rates. We believe that a more refined analysis of the misalignments may be of some use for the Macroeconomic Imbalance Procedure (MIP). This is especially useful for these countries which went through a transition phase and boom/bust periods since their independence. This can have influenced their performances and a judgement based on their own characteristics may be needed.
    We use a panel setup of 11 EU new member states (Croatia is included) over the period 1994-2012 in static and dynamic frameworks, also controlling for the presence of cross-sectional dependence, checking specifically for the role of exchange rate regimes, capital flows and global factors.
    We find that the estimated coefficients for the determinants are in line with the expectations. Moreover, the foreign capital flows, the oil balance and relative output growth seem to play a crucial role in explaining the current account. Some global factors like shocks in oil prices or supply might have played a role in worsening, the current account balance of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in line with the current account gaps, which experience a clear cyclical behaviour. The CAs and REERs are getting close to equilibria in 2012 in most of the countries. The rebalancing is completed for some countries less misaligned in the past like Poland and Czech Republic, but also in the case of Lithuania. When the Foreign Direct Investments (FDIs) are introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments); while the negative misalignments are smaller in magnitude.

    JEL Codes: F31, F32, C23.

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