Publications

Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic effects of public old-age pension reforms and other fiscal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main finding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.

JEL Codes: E24, E26, H55, J11, J46.

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

In this paper we present the structure of OGRE, a dynamic general equilib-rium model with overlapping generations, unemployment and a shadow economy. Based on a parametrized version of the model, we examine the impacts of aging and calculate multipliers of public pension and other fiscal policies. Also, we contrast macroeconomic reactions with pay-as-you-go and fully funded pension plans. Lastly, we highlight the role of unemployment and that of the underground sector in the framework.

JEL Codes: E24, E26, H55, J11, J46.

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

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.

The experimental literature on asset markets has provided many useful insights on the efficiency of market mechanisms. It is unclear whether these results carry over to bonds markets, however. An important feature of bond markets is the relationship between initial public offering (IPO) prices and the probability that the bond issuer will default. First, this probability affects the value of the bond and, therefore, the bond prices. Second, prices paid for the bonds in the IPO determine the bond issuer’s financing costs and, therefore, affect the probability that the bond issuer defaults. We develop a flexible bond market model that accounts for this two-way interaction and that is easily implemented in the laboratory. We examine how subjects price bonds in this setting and find that subjects learn to price bonds rather well after only a few repetitions (both during the IPO and while trading in the secondary market afterward). Bubbles in bond prices are only observed among inexperienced traders. The overall high degree of market efficiency that we find occurs in environments with both increasing and decreasing (equilibrium) fundamental values for bonds.

JEL Codes: C92, C90, D47, G12.

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

Also published in the Journal of Economic Dynamics and Control, Volume 78, Pages 118–148

This paper studies a two-country production economy with complete and frictionless financial markets and international trade in which competition in R&D leads to endogenous new firm creation and economic growth. Current monopolists (“incumbents”) and potential new firms (“entrants”) compete in developing patents domestically. These innovative firms use both consumption goods in their R&D technologies to capture international technological spillovers. In the model specifi- cations with technology spillover one obtains that (i) the cross-country correlation of consumption growth is lower than the one of output growth; (ii) net exports are negatively correlated with output; (iii) the model matches the high co-movement of stock returns across countries. Furthermore, heterogeneity in the R&D technology bundle home bias parameters for incumbents and entrants enables the model to replicate the empirically rather moderate correlation between the R&D innovation probabilities of incumbents and entrants within a country. Moreover, the model produces a positive value premium. Finally, the exchange rate volatility is decreasing in the amount of technology spillovers.

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.

This paper studies the link between demographic factors and labour shares as well as tries to answer the question whether population ageing is responsible for the global decline in labour shares. We found that the link depends on the elasticity of substitution between labour and capital as production factors. Given the empirical estimates of this parameter, we conclude that population ageing is not responsible for the global decline in labour shares. On the contrary, it reduces the speed of this decline.

JEL Codes: E25, C51, J14.

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

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This paper presents an account of the monetary policy stance for euro area countries from 1999 to the beginning of the crisis in 2008. The analysis starts with the derivation of a synthetic index measuring the average tightness of monetary policy across euro area members. The index is constructed using pseudo-Taylor residuals, obtained from an estimated monetary policy rule for the whole euro area and country specific fundamentals. This measure is then decomposed to disentangle the role of inflation and fundamental economic dynamics. Results suggest that there were significant differences in monetary policy stance across euro area members over the period considered. Such differences are primarily driven by wedges in price dynamics, most of which are disconnected from real economic activity.

JEL Codes: E52, E58, E61.

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

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.

The term ‘financialization’ describes the phenomenon that commodity contracts are traded for purely financial reasons and not for motives rooted in the real economy. Recently, financialization has been made responsible for causing adverse welfare effects especially for low-income and low-wealth agents, who have to spend a large share of their income for commodity consumption and cannot participate in financial markets. In this paper we study the effect of fi- nancial speculation on commodity prices in a heterogeneous agent production economy with an agricultural and an industrial producer, a financial speculator, and a commodity consumer. While access to financial markets is always beneficial for the participating agents, since it allows them to reduce their consumption volatility, it has a decisive effect with respect to overall welfare effects who can trade with whom (but not so much what types of instruments can be traded).

JEL Codes: E23, G12, G13, Q11, I30.

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

In this paper we study the effect of a (standard) monetary policy shock in the euro area on the Lithuanian economy. For this purpose we employ a structural vector autoregressive (SVAR) model incorporating variables from both, the euro area and Lithuania. We identify the system using short-term zero restrictions. The model exhibits a block exogenous structure to account for the fact that Lithuania is a small economy and Lithuanian macro variables do not have a significant effect on the euro area variables. In general, we find that a monetary policy shock in the euro area has a stronger effect on the Lithuanian economy than it does on the euro area economy, though the effects are not significant, preventing firm conclusions. We further broaden our analysis employing a panel VAR model for the three Baltic states. This allows us to not only explore the time variation of the euro area monetary policy transmission in the Baltics, but also helps to verify our initial results. The effects are stronger when estimated using the panel VAR model.

JEL Codes: C32, C33, E52.

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

This paper provides an explanation as to why population ageing is associated with deflationary processes. For this reason we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model with post-Keynesian monetary theory. The model links demographic factors such as fertility rates and longevity to prices. We show that lower fertility rates lead to smaller demand for credits, and lower money creation, which in turn causes a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed; they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.

JEL Codes: E12, E31, E41, J10.

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

We extend the endogenous growth model of Kung and Schmid (2015) by adding endogenous labor dynamics and wage rigidities. This leads to an increase of about 250 basis points in risk premia. Additionally, it brings labor market quantities much closer to their empirical counterparts. In particular, wage rigidities generate an increase of around 60 basis points in labor growth volatility.

JEL Codes: E22, G12, O30, O41.

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