Publications

Lithuania has one of the lowest fertility rates among advanced economies. This report combines population-wide administrative microdata, international evidence, and descriptive regressions for European countries to identify the main features of Lithuania’s recent fertility decline and the policy areas most relevant to addressing it. The microdata show that younger cohorts have fewer children at the same age and are more likely to remain childless, suggesting lower completed fertility unless substantial catch-up occurs at older ages. The decline is increasingly concentrated at the transition into parenthood, while family size among mothers remains relatively stable. The combined evidence suggests a targeted and coordinated policy mix rather than a single intervention: financial and parental leave support concentrated around the first birth; reliable childcare availability coordinated with paid parental leave and flexible return-to-work arrangements; measures to improve housing affordability; and timely fertility information and equitable access to infertility care.

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

This study examines the effects of a government bailout on corporate disclosure when a firm is exposed to the risk of investors withdrawing their investments from the firm. The government bailout affects the behavior of investors, which, in turn, alters the disclosure behavior of the firm. We find that the firm discloses less (more) than the case without a bailout when investors have pessimistic (optimistic) beliefs about the firm. These changes in disclosure decision reduce investors’ expectations about the firm’s fundamentals. Therefore, the government bailout can increase the likelihood of the firm facing a liquidity crisis if it distorts the disclosure behavior of the firm.

Keywords: Corporate Disclosure, Government Bailout, Liquidity Crisis, Coordination Failure, Global Game

JEL codes: M40, G01, G28, D82, D83

This article analyzes Small and Medium Enterprise (SMEs) employment dynamics in Lithuania from 2004 to 2024, with particular attention to spatial patterns at the municipality level. I document employment polarization within the TDS enterprise panel: while total sample employment grew, SMEs employment share declined by approximately ten percentage points, driven primarily by contraction in medium-sized enterprises. Meanwhile, micro firm-year counts expanded rapidly while average employment per micro firm declined sharply, a pattern consistent with very small-scale activity, formalization, self-employment, or tax/legal-form sorting. Geographic analysis reveals stark regional divergences.

Keywords: small and medium-sized enterprises, employment polarization, firm size distribution, regional disparities, Lithuania

JEL codes: J21, L25, L26, R11

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

The adoption of the positive neutral countercyclical capital buffer (PN CCyB) has increased across jurisdictions, yet quantitative calibration methodologies vary considerably and typically address either the PN CCyB or the overall CCyB separately. This paper proposes a unified calibration approach that addresses both using a macroprudential stress testing model. The approach simulates capital depletion under macroeconomic scenarios that feature different degrees of cyclical risk. By comparing capital depletion across these scenarios, it isolates incremental capital erosion attributable to cyclical developments. Applied to the Lithuanian banking sector across 23 sub-sample periods covering 2018Q4–2024Q2, the calibration indicates a PN CCyB in the range of
0.75–1.25 percent and an overall CCyB around 2 percent under elevated cyclical risk. The results are robust across alternative balance sheet dynamics and scenario severity assumptions.

Keywords: Countercyclical Capital Buffer, Macroprudential Policy, Stress Testing, Bank Capital, Systemic Risk.

JEL codes: E58, G21, G28.

There are recurring claims in the public debate and the media that central banks (including the ECB) do not pay sufficient attention to the money supply and therefore have overlooked the inflation surge in 2022–23. This article therefore examines why central banks in advanced economies no longer regulate the money supply and what factors are driving changes in the relationship between the money supply and the inflation. The analysis has revealed a highly volatile and at times even negative empirical relationship between the money supply and the future inflation in Lithuania and across the euro area. However, this relationship may temporarily strengthen during periods of elevated inflation, such as in 2022–23. Monetary policy and fiscal support enabled businesses and households to weather the supply and income shocks caused by the COVID-19 crisis, as well as the surge in energy and food prices following Russia’s war against Ukraine. Policymakers had to make decisions in real time amid considerable uncertainty, and the risk of under-stimulating the economy was extremely high and could have been very costly. Although the recently elevated risk of supply shocks underscores the need to pay due attention to money supply growth and its underlying drivers, the money supply is no longer a suitable primary guide for monetary policy in advanced economies. Based on a comprehensive analysis and projections of a wide range of indicators, including the money supply, the ECB adopts monetary policy decisions aimed at maintaining inflation at its 2% medium-term target in the euro area.

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

Available only in Lithuanian

This paper assesses reserves of Lithuania’s social insurance fund (Sodra) under demographic ageing and macroeconomic stress, projecting the budget through 2050 under two pension indexation rules: the current law and a seven-year average rule that allows for reserves to be used for pension expenses. The choice between the rules produces a sharp trade-off between reserve accumulation and pension adequacy. Within the seven-year average baseline, investment and fiscal instruments can ease the demographic pressure but cannot resolve it. Under a Global Financial Crisis-style shock, the indexation rule determines the distribution of crisis costs: reserves absorb the shock under one rule, pensioners under the other.

Keywords: pension reserves, pay-as-you-go, demographic ageing, replacement rate, crisis resilience

JEL codes: H55, J11, J26, G11.

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

Public spending has been shown to stimulate private consumption and aggregate output. Less is known about the extent to which public demand and procurement markets can affect individual firms, particularly their financial stability and resilience to shocks, and can re-balance risks across businesses in the economy. In this paper, I focus on these issues and investigate them both empirically and theoretically. To do so, I first build a novel database with firm-level data on US government procurement programs and establish the unpredictability of competitive contracts through an event study. I then explore the effects of procurement contracts on firms’ balance sheets and find a significant positive impact on winning firms’ sales, profits and investments. I contribute to the literature by showing that public procurement can dampen perceived uncertainty and volatility associated with the firm in times of stringent financial conditions. I generalise and confirm my empirical findings in a general equilibrium model with two types of firms, contractors and outsiders. Using the theoretical model, I provide a deeper understanding of the design of procurement markets and their interplay with public policies to balance uncertainty and risks across firms.

Keywords: Government procurement, fiscal policy, firm uncertainty

JEL codes: H57, E62, H32

This paper studies the interdependence of myopic corporate behavior and the so-called feedback effect, where financial prices contain useful information for corporate decision making. We model the feedback effect in a mostly standard trading environment, except that its tractable analysis is ensured by Pareto distribution of productivity. The analysis shows that the feedback effect causes a price inflation and the resulting long-term productive inefficiency, which can be understood in the context of innovation strategies. It sheds light on the negative side of learning from financial prices, and, at the same time, explains its prevalence, which requires the availability of superior information in financial markets.

Keywords: Feedback effect, learning, real efficiency, short-termism

JEL codes: D82, G01, G11, G14.

In factor-augmented vector autoregression (FAVAR) models, some of the factors are treated as observable while the remaining factors are latent and need to be estimated from a large cross-section of time series. Given that economic concepts such as inflation or output can often be proxied by different variables and that macroeconomic time series are commonly subject to substantial data revisions, the assumption that some factors are perfectly observable appears unnecessarily strong. In this paper we relax the assumption and treat observable factor proxies as noisy measures of true underlying factors. We show that when there are more observable proxies than true underlying factors, the standard FAVAR models reduce to a dynamic factor model (DFM) with a rank constraint. We propose an iterative estimation procedure that alternates between principal components estimation and solving a reduced-rank regression model. We further discuss a modification of the method with group-lasso sparsity constraints to incorporate regularization and variable selection at the same time. We use Monte Carlo simulations to demonstrate the effectiveness of the proposed method for factor estimation and forecasting in a DFM with weak factors and its usefulness for estimating structural impulse responses to oil supply and demand shocks using a FAVAR model.

Keywords: factor-augmented vector autoregressions, noisy factor proxies, principal components, reduced-rank regression, sparse regression

JEL codes: C32, C38, C55, E17.

We use CPI micro data for nine euro area countries to document new evidence on consumer price stickiness in the euro area during the 2021-2024 inflation cycle. In 2022, the monthly frequency of price changes reached 12%, compared with an average of 8% over 2010–2019, roughly a four-percentage- point increase; it then fell quickly in 2023 and more slowly in 2024, ending close to its pre-pandemic level. The decline in the frequency of price changes was faster for food and nonenergy industrial goods (NEIG) than for services, where frequencies remained elevated in 2024. The overall frequency rose mainly because there were more price increases, while the magnitude of the average size of the price increases or decreases changed only marginally during the surge. Products with a larger imported-energy cost share responded more strongly, and hazard-rate evidence shows that the probability of price adjustments increases with the gap between actual and optimal prices, consistent with state-dependent pricing and a steepening of the Phillips curve. To illustrate the implications of this state dependence, a macro model suggests that peak inflation would have been almost 1 percentage point lower if the frequency had not responded to the sinflation surge.

Keywords: Price rigidity, euro area, inflation surge, micro price data.

JEL codes: EE31, E52, F33, L11

This research provides a status-based explanation for the high rates of female labor force nonparticipation (FLFNP) and the sustained increase in these rates over time that have been documented in many developing economies. This explanation is based on the idea that households or ethnic groups can signal their wealth, and thereby increase their social status, by withdrawing women from the labor force. If the value of social status or the willingness to bear the signaling cost is increasing with economic development, then this would explain the persistent increase in FLFNP. To provide empirical support for this argument, we utilize two independent sources of exogenous variation – across Indian districts in the cross-section and within districts over time – to establish that status considerations determine rural FLFNP. Our status-based model, which is used to derive the preceding tests, is able to match the high levels and the increase in rural Indian FLFNP that motivate our analysis. Counterfactual simulations of the estimated model identify policies that could potentially reduce FLFNP in economies where the status mechanism is relevant.

Existing research on monetary policy communication has mainly focused on the textual content of press-conference transcripts, while studies on voice sentiments remain limited. We advance the relevant literature by leveraging advanced audio analysis techniques, a large language model and high-frequency financial market data at the one-second frequency, to provide new insights into the changing communication features during ECB press conferences. We evaluate ECB communication across different topics and sample periods, and assess their impacts on euro area financial markets between 2012 and 2024. Voice analysis reveals that our model distinguishes valence, arousal and dominance features with relative accuracy. The regression results indicate that communication regarding the broader economic outlook and inflation triggers stronger and more widespread market responses than the topic of monetary policy measures. At the same time, the text sentiments and arousal-valence feature of voice generate a much higher number of significant effects compared to the voice dominance characteristic. These findings illustrate the importance of audio analysis in explaining monetary policy communication messages and in internalizing the nuanced central bank communication with its heterogeneous impact on financial markets.

Keywords: ECB, euro area, audio analysis, monetary policy, communication, sentiment analysis, financial markets.

JEL codes: C80, E43, E44, E58, G14.