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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 131
2025-02-06

Earnings Inequality and Risk over Two Decades of Economic Development in Lithuania

  • Abstract

    Using Social Security records between 2000 and 2020, we provide a comprehensive analysis of
    labor earnings inequality and its dynamics over the course of Lithuania’s economic development.
    Since 2000, there has been a substantial decline in earnings inequality, largely driven by the rapid
    growth of earnings at the bottom of the distribution, while earnings volatility has hardly changed.
    Importantly, we estimate a relatively high sensitivity of earnings growth to changes in real GDP,
    which declines with the level of permanent income. Additionally, we find that the idiosyncratic
    earnings risk of individuals at the bottom of the permanent income distribution is less sensitive to
    aggregate growth than that of individuals in the top half. Taken together, our findings underscore
    that analyzing earnings risk is critical to properly understanding the dynamics of inequality and
    designing effective policies to address it.


    Keywords: Income inequality, income risk, income mobility, administrative data

    JEL codes: D31, E24, J31

No 130
2025-01-28

Forecasting with the help of survey information

  • Abstract

    In this paper we propose a parsimonious way of combining survey expectations with empirical models to produce forecasts. We do so by augmenting a traditional vector autoregression model with forecasts for different variables and horizons from the ECB Survey of Professional Forecasters. The additional information improves estimation efficiency while maintaining a treatable model. In terms of forecasting performance, the gains from adding survey forecasts are greater at the one and two year ahead horizons, while they are limited at shorter horizons (below one year). Larger gains are found in terms of density performance than in terms of point. Forecasts of real GDP growth benefit the most from survey information, whereas inflation forecasts are improved the least. This latter result is partially driven by the very poor performance of SPF during the 2022 high inflation period. Forecasts for unemployment also benefit from including expectations for GDP and inflation, although not during the COVID pandemic period.

    Keywords: Expectations, Forecasting, Judgement, Survey of Professional Forecasters

    JEL codes: C32, C33, C51, D84, E37

No 129
2025-01-17

Optimal Firm Entry with Returns to Scale

  • Abstract

    We study the welfare implications of distortions, such as markups and returns to scale, when firm entry is slow to adjust, allowing quasi-rents to persist for longer. First, we present evidence on differences in speed of firm entry adjustment across US industries. In some industries, such as hospitality, firms respond rapidly to profit opportunities, arbitraging quasi-rent quickly. Whereas, in other industries, such as construction, entrants respond slowly, sustaining incumbents’ quasi-rents for longer. We develop a model of sluggish firm adjustment, which shows that the sluggishness of firm adjustment magnifies the welfare costs of distortions. We study a model with a fixed cost and increasing marginal cost such that a perfectly competitive equilibrium exists, and in the absence of distortions market and planner equilibrium coincide with firms operating at minimum efficient scale. We contrast outcomes when there is curvature on the demand-side of the economy from markups and curvature on the supply-side of the economy from returns to scale, adding counter-evidence to the perception that the setups are isomorphic.

    Keywords: Markups, Firm Entry, Returns to Scale, Welfare

    JEL codes: E32, D21, D43, L13, C62

No 128
2024-12-17

The Heterogeneous Impacts of Firm Upgrading on Energy Intensity

  • Abstract

    This paper examines the influence of export activity on a firm’s energy intensity, with a particular focus on the role of the upgrading process. We introduce a firm-level complexity index incorporating two dimensions: the complexity of the goods traded, and the complexity of the destination markets served. By employing a quasi-experimental shift-share research design (Borusyak et al., 2022), we show that growth in external demand incentivizes firms to undertake upgrading activities, resulting in lower energy intensity. Furthermore, financial constraints diminish the energy efficiency gains from upgrading, especially for small firms. In addition, we explore whether upgraded firms can leverage higher markups, and show that this strategy is effective only for large firms. These findings indicate the need for targeted support policies for small firms and highlight the critical importance of maintaining open trade in an increasingly fragmented world.

    Keywords: Firm Upgrading, International Trade, Energy Intensity, Complexity, Structural Transformation, Economic Development.

    JEL classification: F14, D22, O33, Q56.