Bank of Lithuania

Economic research

Economic research at the Bank of Lithuania is primarily conducted at two units, namely, the Center for Excellence in Finance and Economic Research (CEFER) and the Applied Macroeconomic Research Division (TMTS), which is part of the Economics Department. The main aim of CEFER is to conduct and publish high-quality academic research and contribute to knowledge at the forefront of economic and financial research. The TMTS aims in particular at conducting economic and financial research with direct importance for central banking and policy-making.

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Research priorities

Economists at CEFER conduct academic research and publish their papers in well-reputed scientific journals. Main research topics include the following:

  • Macrofinance
  • Behavioural macroeconomics and finance
  • International economics and finance
  • Macroeconometric methods and modelling
  • Dynamic Stochastic General Equilibrium (DSGE) models
  • Experimental economics
  • Labour economics

Priority areas at the TMTS are determined on the basis of the demand for sound economic analysis, forecasting and decision-making in the areas of monetary policy, exchange rates and financial stability, as well as in the light of the Bank’s cooperation with the European System of Central Banks (ESCB). The four priority research areas are as follows:

  • Monetary and fiscal policy
    • inflation
    • monetary policy transmission mechanism
    • automatic fiscal stabilisers and fiscal rules
  • Modelling and forecasting
    • development and estimation of the DSGE model for Lithuania
    • short-run forecasting models
  • Convergence research
    • long-run trends and equilibrium values
    • structural changes in aggregate supply
  • Financial stability
    • liquidity risk in the banking sector
    • credit risk in the banking sector
    • development of the macro stress testing model
    • international contagion risk

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Recent publications

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No 48. Claudio Battiati. R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles
2017-12-11
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No 16. Patrick Grüning. Heterogeneity in the internationalization of R&D: Implications for anomalies in finance and macroeconomics
2017-10-20
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No 47. Giuliano Curatola, Michael Donadelli, Patrick Grüning. Technology trade with asymmetric tax regimes and heterogeneous labor markets: Implications for macro quantities and asset prices
2017-10-05
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No 46. Claudio Cesaroni. Optimal long-run inflation and the informal economy
2017-09-20
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No 48. Claudio Battiati. R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles

Recent evidence suggests that credit booms and asset price bubbles may undermine economic growth even as they occur, regardless of whether a crisis follows, by crowding out investment in more productive, R&D-intensive industries. This paper incorporates Schumpeterian endogenous growth into a DSGE model with credit-constrained entrepreneurs to show how shocks affecting firms' access to credit can generate boom-bust cycles featuring large fluctuations in land prices, consumption, and investment. During the expansion, rising land prices tend to crowd out capital and (especially) R&D investment: in the long run, this results in lower productivity levels, which in turn implies lower levels of aggregate output and consumption. Moreover, higher initial loan-to-value ratios tend to be associated with larger macroeconomic fluctuations. A counter-cyclical LTV ratio targeting credit growth has relevant stabilization effects but brings about small gains in terms of long-run consumption levels, and thus of welfare.

JEL Codes: E22, E32, E44, O30, O40.

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

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No 16. Patrick Grüning. Heterogeneity in the internationalization of R&D: Implications for anomalies in finance and macroeconomics

Empirical evidence suggests that investments in research and development (R&D) by older and larger firms are more spread out internationally than R&D investments by younger and smaller firms. In this paper, I explore the quantitative implications of this type of heterogeneity by assuming that incumbents, i.e. current monopolists engaging in incremental innovation, have a higher degree of internationalization in their R&D technologies than entrants, i.e. new firms engaging in radical innovation, in a two-country endogenous growth general equilibrium model. In particular, this assumption allows the model to break the perfect correlation between incumbents’ and entrants’ innovation probabilities and to match the empirical counterpart exactly.

JEL Codes: E22, F31, G12, O30, O41.

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

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No 47. Giuliano Curatola, Michael Donadelli, Patrick Grüning. Technology trade with asymmetric tax regimes and heterogeneous labor markets: Implications for macro quantities and asset prices

The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude toward innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labor market rigidity. We develop a two-country model, in which both countries rely on R&D and adoption, to study the shortand long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, it helps to explain the differences in macro quantities and equity returns observed in the international data.

JEL Codes: E3, F3, F4, G12.

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

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No 46. Claudio Cesaroni. Optimal long-run inflation and the informal economy

This paper studies the optimal long-run rate of inflation in a two-sector model of the Lithuanian economy with informal production and price rigidity in the regular sector. The government issues no debt and is committed to follow a balanced budget rule. The informal sector is unregulated and untaxed and its existence limits the government’s ability to collect revenues through fiscal policy. Such environment provides therefore the basis for quantifying the possible existence of a public finance motive for inflation. The main results can be summarized as follows: First, there is a strong heterogeneity in the optimal inflation rate which depends on the tax rate that is endogenously adjusted to keep the budget balanced. Inflation can be as high as 6.77% when the capital tax rate is endogenous, but when labor income taxes are adjusted optimal policy calls for a rate of deflation such that the nominal interest rate hits the zero lower bound. Second, the optimal inflation rate is a non-decreasing function of the size of the informal economy and, in most cases, there is a positive relationship between the two. Finally, substantial deviations from zero inflation are observed even in presence of a plausible degree of price rigidity.

JEL Codes: E26, E52, H26.

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

Last update: 18-04-2017