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Working Paper Series

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Working papers disseminate economic research relevant not only to the tasks and functions of the Bank of Lithuania and of the European System of Central Banks but also appealing more broadly to the academic community in economics and finance. They present, discuss and analyse the results of original and academically rigorous theoretical and/or empirical research. Working papers constitute the basis for publications in leading academic journals, making contributions to the existing literature in the fields of economics and finance. They encourage collaboration between the researchers of the Bank of Lithuania and other central banks, Lithuanian and foreign universities and research institutes.

Papers are only available in English.

No 106

Housing Value and Consumption in Europe: Micro-Findings from Post-Financial Crisis Data

  • Abstract

    Additional housing equity collateral can loosen borrowing constraints and increase spending for households that value their home highly. However, rising home values also raise the cost of living via higher imputed rental costs, offsetting their impact on consumption. Usage of Household Finance and Consumption Survey microdata and third-party evaluation of housing value enable identification of the causal effect of house price changes on consumer spending. This paper is one of the first that explores this relationship European-wide with an application of an instrumental variable technique. The paper identifies heterogeneities among different households based on their housing status. A $1 increase in home values leads to a $0.127 increase in spending for homeowners overall, and $0.185 for homeowners with mortgages specifically. Results reflect large responses among credit-constrained households, suggesting borrowing constraints as one of the key drivers of the MPC out of housing wealth.

    Keywords: Housing Wealth, House Prices, Household Consumption.

    JEL codes: E21, G51, O18.

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

No 105

New Facts on Consumer Price Rigidity in the Euro Area

  • Abstract

    Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.

    Keywords: price rigidity, inflation, consumer prices, micro data.

    JEL codes: D40, E31.

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

No 104

Aid Effectiveness: Human Rights as a Conditionality Measure

  • Abstract

    The ‘aid conditionality’ hypothesis as advocated in the literature suggests that aid is effective in augmenting growth only in the presence of a sound policy environment. This hypothesis was so influential that its policy recommendation, to provide aid conditional upon recipient domestic policies, is currently the dominant ODA allocation criterion. However non-economic dimensions of development (political and institutional) are increasingly seen as fundamental. For this reason, this paper focuses on the linkage between aid and a noneconomic factor like Human Rights (reflecting repression and corruption) as a measure of aid effectiveness, in explaining growth outcomes across 42 Least Developed economies. We find that countries with better human rights experience positive growth from aid receipts, signifying the role of strong institutions and good governance in enabling more effective use of aid. The paper thus concludes that the measurement and monitoring of human rights provision is a useful tool in gauging the likely effectiveness of foreign aid.

    Keywords: Human rights, aid effectiveness, corruption, oligarchy.
    JEL Classification: F35, P16, P40, O19.

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

No 103

Wage and Employment Impact of Minimum Wage: Evidence from Lithuania

  • Abstract

    This paper evaluates the worker-level effects of a historically large and permanent increase in the minimum wage in Lithuania. Our identification strategy leverages variation in workers’ exposure to the new minimum wage, and exploits the fact that there has been no increase in the minimum wage in previous years, to account for heterogeneous labor market prospects of low-wage workers relative to high-wage workers. Using detailed administrative records to track workers before and after the policy change, we show that the minimum wage hike significantly increased the earnings of low-wage workers. This direct effect was amplified by wage spillovers reaching the median of the income distribution. Overall, we find no negative effects on the employment prospects of low-wage workers. However, we provide suggestive evidence that young workers, highly exposed municipalities, and tradable sectors may be more negatively affected. Taken together, our findings imply an employment elasticity with respect to the minimum wage of -0.021, and an own-wage elasticity of -0.033, suggesting that wage gains dominated employment losses.

    Keywords: Minimum Wage, Employment, Wages.

    JEL codes: J23, J38, J48.

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