Publications

This paper examines the energy efficiency of real estate used as collateral for bank loans in Lithuania, addressing the issue of missing data on building energy performance. We develop econometric models to estimate energy efficiency based on building type and characteristics and link the real estate energy data with loan-level information from the national credit register. Our primary contribution is the development of models to impute missing energy efficiency classifications, offering insights into the quality of real estate-backed bank credit in the context of climate-related risks. Our findings highlight that a significant portion of bank loan portfolios in Lithuania lacks energy efficiency data. We also propose specifications of our models as a potential benchmark for market practices and discuss policy recommendations to address data gaps, enhancing risk assessment and transparency in the financial sector.

Keywords: Climate Change, Energy Efficiency, Asset Pricing, Real Estate Collateral

JEL codes: G21, G32, G28

This paper estimates the natural real interest rate (r*) for Lithuania over the period 2000–2025 and assesses the implied monetary policy conditions. The paper employs a semi-structural unobserved-components model tailored to a small, open, and converging economy by incorporating real effective exchange rate dynamics, while also enhancing output-gap identification and exploring the role of survey-based inflation expectations. The results indicate that Lithuania’s r* was relatively high in the early 2000s, declined markedly during the global financial crisis, remained persistently low thereafter, and returned to positive values in recent years. Following the euro’s adoption, Lithuania’s estimated r* exhibits closer co-movement with the euro area’s natural rate, consistent with deeper economic and financial integration. Estimates of the real interest rate gap suggest that monetary conditions have been predominantly accommodative historically and broadly neutral in recent periods.

Keywords: Natural interest rate, r-star, unobserved components, Lithuania; small open economy, interest rate gap.

JEL codes: E43, E52, C11, C32, F41.

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

Informality is pervasive in many developing economies and is often accompanied by lowinvestment in human capital. We study the effects of international trade through the lens of a model with heterogeneous firms and workers, featuring labor market frictions. Complementarity between workers’ human capital investment decisions and firms’ hiring strategies can give rise to multiple equilibria. In the “bad” equilibrium, informality have stronger incentives to formalize and workers invest more in human capital. We show that, under certain conditions, trade can act as a coordinating device that shifts the economy toward the good equilibrium. The novel mechanism we uncover involves effort in human capital investment as a key margin of adjustment to trade shocks.

Keywords: Big Push, human capital, informality, international trade, multiple equilibria.

JEL codes: E24, F12, F16, J24, J46, O17.

Motivated by the policy debate on financial transaction taxes, this paper analyzes a model of primary financial markets with financially constrained entrepreneurs and investors subject to assetholding costs or risk aversion, as well as its extension with secondary-market trades which arise from a shock to some of these investors. The analysis of the basic model indicates underproduction in the real sector and overissuance of underpriced assets, calling for policy intervention. Next, the extended model is analyzed to characterize the optimal policy mix to correct these inefficiencies, which consistently involves subsidizing primary-market asset purchases and taxing secondarymarket transactions. The latter can be viewed as a Tobin-tax-like policy instrument to reduce price fluctuations across states and its rate is higher for riskier and more profitable asset issuers.

Keywords: Financial transaction taxes, Pecuniary externality, Financial friction, Financial constraints

JEL codes: G11, G18

This paper studies determinacy in a three-country New Keynesian DSGE model. Extending Gopinath et al. (2020), I examine how invoicing currencies and openness shape monetary policy effectiveness. Three results emerge. First, there is a robust trade-off such that stronger output gap targeting allows weaker inflation responses without loss of determinacy. Second, pricing paradigms matter. Producer currency pricing (PCP) yields the broadest determinacy regions, local currency pricing (LCP) lies in between, and dominant currency pricing (DCP) is most restrictive for non-issuers of the dominant currency. Third, openness narrows determinacy sets as it amplifies interactions among central banks’ policies, complicating the attainment of determinacy. An application with Bayesian estimates for the U.S. and the euro area confirms these patterns. The results highlight that determinacy depends not only on domestic rules but also on global invoicing structures and trade integration.

Keywords: Determinacy, Taylor rule, Three-country new Keynesian model, Pricing paradigms, Opennessy

JEL codes: E31, E52, E58, F33, F4

We study heterogeneity in households’ credit across nine European countries (Belgium, Spain, Hungary, Ireland, Italy, Latvia, Lithuania, Portugal, and Slovakia) during 2022-2024 using granular credit register data. We first document substantial between- and within-country variation in mortgage and consumer lending by borrower age, loan maturity, and interest rate fixation. We then quantify the passthrough of the ECB’s recent tightening cycle to household borrowing costs, and assess its heterogeneous impact across households. Pass-through is nearly complete for mortgages (around 0.9) but considerably weaker for consumer credit (around 0.4). While mortgage pass-through is relatively homogeneous across countries, consumer credit shows pronounced cross-country differences that cannot be explained by borrower or loan characteristics. Younger households face stronger mortgage pass-through but weaker consumer credit pass-through relative to older borrowers, and longer maturities are associated with stronger pass-through in both credit markets.

Keywords: monetary policy transmission; household borrowing; credit registers; interest rate pass-through; cross-country heterogeneity

JEL codes: E52, G21, D14

This study examines the impact of large-scale energy efficiency renovations on apartment prices in Lithuania by combining administrative data on transactions with information on renovation projects. We find that the increase in apartment prices typically falls short of covering renovation costs, with the estimated gap reaching approximately 25%. This gap – the net price effect – is particularly pronounced outside the three largest municipalities, largely due to regional differences in apartment price levels rather than renovation costs. We propose a search-andmatching housing market model to explain these patterns. In this model, higher market thickness increases the net price effect, and may also help explain the lower renovation activity observed in thicker markets.

Keywords: Energy efficiency renovation, residential real estate, regional variation in property values, repeated-sales model

JEL codes: Q56, R31, R32

Assessing government bond yields in smaller, less liquid markets such as Lithuania presents unique challenges due to limited secondary market activity, sparse trading data, and unreliable existing benchmarks like Bloomberg estimates. This study addresses these limitations by integrating data from primary issuances and secondary market quotes to construct a more accurate and consistent view of Lithuania’s yield curve. Employing the Nelson-Siegel-Svensson (NSS) model, we estimate a synthetic 10-year benchmark yield that offers improved comparability with larger Eurozone economies. Our analysis shows that while yield spreads between primary and secondary markets are generally minimal, they widened during periods of geopolitical and economic stress—particularly following outbreak of the Russia–Ukraine war and the COVID-19 pandemic—reflecting heightened risk perceptions and liquidity constraints. Notably, primary market yields temporarily rose above secondary quotes after the Russian invasion of Ukraine, signalling price discovery issues. Additionally, while a spread was observed between international issuance yields and their corresponding synthetic benchmarks, this was not the case for domestic bonds. We also find that central bank interventions, such as reverse auctions conducted by the Bank of Lithuania, played a stabilizing role during times of elevated uncertainty. These findings underscore the value of combining diverse data sources with robust yield modelling to produce reliable benchmarks and better understand dynamics in illiquid sovereign debt markets.

Keywords: yield curve, Lithuania, monetary policy.

JEL codes: CE43, G12.

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

This paper examines howthe investment horizon effect influences energy-efficiency investments, showing that older individuals have lower incentives to invest in energy efficiency. Using detailed microdata from England, we document that properties occupied by older households are systematically less energy efficient. We develop a two-period model where households make energyefficiency investment decisions under mortality risk, generating predictions about both individual and neighborhood-level investment patterns. Testing these predictions using historical instruments for neighborhood age structure, we find that a one-year increase in neighborhood mean age causes a 0.7 percentage point increase in energy inefficiency.

Keywords: household balance sheet, inflation; fiscal policy, interest rates, household consumption.

JEL codes: Q40, R31, J14, D14, Q48

We use restrictions derived from frontier models of directed technical change to identify an energy-saving technology shock in a Bayesian structural VAR of the U.S. economy. This shock is associated with a persistent reduction of the carbon intensity of output. It also leads to a delayed but strong increase of GDP which gives rise to substantial additional fossil fuel consumption and new emissions. As a result, per capita emissions fully rebound after an initial decline. These effects can largely be attributed to a substitution of fossil fuel end-use by electricity, much of which has historically been generated using fossil fuels.

Keywords: energy-saving technology shocks, carbon emissions, structural vector autoregressions.

JEL codes: C32, O47, Q43, Q55

This document offers an ex-ante assessment of the proposal to allow the withdrawal of funds from the second pillar of the Lithuanian pension system. First, we use a quantitative macroeconomic model to quantify, under alternative scenarios, the potential impact that the withdrawal of Pillar II funds might have on the economy in the medium term. Second, we offer a long-term view of the current pension replacement rates and the consequences that the withdrawal of funds might have for those individuals who decide to opt-out of Pillar II.

We examine the role of government investment in defense capital as a deterrence tool. Using an optimal fiscal policy framework with endogenous disaster risk, we allow for an endogenous determination of geopolitical risk and defense capacity, which we discipline using the Geopolitical Risk Index. We show both analytically and quantitatively that financing defense primarily through debt, rather than taxation, is optimal. Debt issuance mitigates present tax distortions but exacerbates them in the future, especially in wartime. However, since additional defense capital deters future wars, the expected tax distortions decline as well, making debt financing a welfare-improving strategy. Quantitatively, the optimal defense financing in the presence of heightened risk involves a twice higher share of debt and backloading of tax distortions compared to other types of government spending.

Keywords: Optimal Fiscal Policy, Incomplete Markets, Endogenous Disaster Risk.

JEL codes: E62, D52, E60