Bank of Lithuania
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All results 192
No 46

Micro-assessment of macroprudential borrower-based measures in Lithuania

  • Abstract

    The high-paced growth of the Lithuanian mortgage market may cast doubt on either the efficacy of the country’s macroprudential toolkit, or the appropriateness of its current parametrisation in putting a backstop to excessive dynamics. This paper assesses the adequacy of BBM’s in Lithuania by building a novel lifetime expected credit loss framework that is founded on actual loan-level default and household income data. Based on the modelling framework we document seven findings which are relevant for policymakers. We show that the BBM package effectively contains mortgage credit risk and that housing loans are more resilient to stress than in the pre-regulatory era. Our BBM limit calibration exercise reveals that: i) in the low-interest rate environment income-based measures could have been tighter; ii) borrowers taking out secondary mortgages rightly are and should be required to pledge a higher down payment of at least 30%.

    Keywords: macroprudential policy, borrower-based measures, LTV, mortgage credit risk, lifetime expected credit loss, probability of default.

    JEL Codes: C25, E61, G18, G21, G51.

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

No 5

Overview of the ongoing monitoring of customers' business relationships and transactions

  • Abstract

    The Bank of Lithuania, in the course of its risk-based supervision, observes that FMPs face issues related to the practical implementation of monitoring. This document provides a brief overview of the purpose of the organisation and implementation of monitoring, the identification and interoperability of the monitoring model/framework and solutions, the adaptation of individual monitoring solutions, including monitoring scenarios, to the FMP’s business model and the existing customer portfolio, as well as the periodic review and testing of the monitoring solutions, including automated scenarios. This review also aims to provide a brief overview of possible monitoring solutions in cases of increased ML/TF risks, best practices in the review of alerts generated by the automated monitoring system and in the process of conducting more in-depth internal investigations, as well as practical examples of internal investigations that have been carried out inappropriately.

    The overview is based on the provisions of the legislation of the Republic of Lithuania, best practices of international organisations and other supervisory authorities, as well as best practices of financial institutions observed by the Bank of Lithuania in the exercise of its supervisory functions.

No 113

Employee-Owned Firms and the Careers of Young Workers

  • Abstract

    Using detailed administrative data from Spain, we investigate the impact of having an initial work experience in an employee-owned firm (EOF) versus a conventional business on subsequent earnings. We find that young workers’ exposure to EOFs at the time of labour market entry reduces earnings by about 8% during the first 15 years in the labour market. The selection of individuals with low initial ability in EOFs does not appear to be a relevant channel. Our results seem to be rather related to differences in job mobility and wage returns to experience. On the one hand, we document lower wage returns to experience acquired in EOFs, although no differences in subsequent career progression in terms of promotions. On the other hand, we find that workers who had their first job in EOFs show a strong attachment to such a business model and are less likely to voluntarily leave their employers. Taken together, our findings suggest the existence of nonpecuniary job attributes offered by EOFs that might compensate for lower lifetime earnings.

    Keywords: Employee-Owned Firms, Careers, Wages, Job Mobility

    JEL Classification: J31, J50, J62

No 45

Combating Climate Change through Policy Instruments. A Meta-Analysis of Carbon Taxation

  • Abstract

    Recently, there has been a surge of interest in policies that target climate change. This paper begins by discussing why policymakers, and central banks in particular, should be concerned about climate change, and goes on to argue why carbon pricing is an appropriate political instrument to reduce greenhouse gas (GHG) emissions. The paper details two categories of carbon pricing, namely carbon taxation and the introduction of Emission Trading Systems (ETSs), illustrating why a carbon tax is the more efficient instrument. Popular models for optimal carbon taxation and implications of carbon taxation are discussed. The paper concludes with recommendations to policymakers, which include advocacy of differentiated rather than uniform carbon taxation, phased-in carbon taxation instead of a blanket approach, introduction of the carbon border adjustment mechanism (CBAM), and Green Quantitative Easing (QE).

    Keywords: carbon taxation, climate change, green QE.

    JEL Codes: Q54, Q58, H23, E51, E62

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

No 44

Wage Growth in Lithuania from 2008 to 2020: Observed Drivers and Underlying Shocks

  • Abstract

    This paper studies the drivers of wage growth in Lithuania over the period 2008-2020. Using administrative data as well as aggregate measures reflecting the state of the economy, we estimate an extended version of a wage Phillips curve. Our reducedform estimates indicate that nominal wage growth was tightly linked to labor market fluctuation over this period. Labor productivity, changes in the minimum wage, and the composition of employment also contributed to wage dynamics. However, we find little evidence that past inflation has been a push factor. To understand the underlying economic primitives behind our findings, we estimate a structural Bayesian autoregressive model. Our structural analysis reveals a significant contribution from aggregate supply shocks, reflecting a stronger relationship between productivity and wages than implied by our reduced-form estimates. Moreover, the historical decomposition reveals that since 2013, wages grew over and above productivity due to rising aggregate demand and labor market disturbances.

No 112

Determinants of House Price Expectations in Europe

  • Abstract

    I use data from the European Central Bank’s Household Finance and Consumption Survey (HFCS) to examine how house price expectations differ across Europe and to identify the main drivers of such expectations. During the period 2010-2017, housing-related assets drove the household balance sheet evolution. Therefore, house price expectations remained highly heterogenous across European countries. The paper found that changes in income and house prices are the key determinants of house price expectations. Homeownership status, income and wealth distributions also explain part of the heterogeneity in household expectations about house prices in Europe. All these effects appear to be stronger for renters and for households from the bottom quintiles in income and wealth distributions.

    Keywords: house price expectations; housing; household portfolio.

    JEL Classification: D10, D31, D84, G11

No 111

A factor-augmented new Keynesian Phillips curve for the European Union countries

  • Abstract

    In this paper, a factor-augmented version of the hybrid New Keynesian Phillips curve (NKPC) is assessed using a data set comprised of a large panel of European Union (EU) member countries. The factor-augmentation is natural given that country-level inflation rates are highly co-moving. The presence of unattended common factors is important because it raises the issue of omitted variables bias, as the real marginal cost, which is a regressor of the NKPC, is likely to load on the same factors as inflation. One possibility here is to employ the regular instrumental variables approach. However, if the external instruments are subject to the same factors as those in the error term of the NKPC, the instruments would be invalid and the approach would therefore be inappropriate. We propose a novel econometric approach to estimate the hybrid NKPC, which allows for very general forms of factor dependencies and endogeneity, and should as a result lead to improved identification. Our main findings provide support for the hybrid NKPC when the presence of unknown common factors as well as external instruments are accounted for, although the results differ depending on the countries included in the estimation. More specifically, the evidence is stronger when the full sample of EU or Euro Area countries is used, rather than solely the new EU member countries which joined the EU in 2004 or later.

    Keywords: New Keynesian Phillips curve, Inflation, Dynamic panel data model, Cross-sectional dependence, Common factors.

    JEL codes: E31; E52; C13; C23.

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

No 110

The Impact of CBDC on Bank Deposits and the Interbank Market

  • Abstract

    This paper investigates how the introduction of a central bank digital currency (CBDC) impacts the banking sector. The deposit market is modeled as a Salop circle and deposits are subject to liquidity shocks. Absent a CBDC the interbank market can redistribute liquidity between banks. However, the central bank does not take part in the interbank market and CBDC leads to greater reliance of the banking sector on central bank standing facilities. The model shows adjusting the remuneration rate of CBDC has little pass-through to the deposit rate set by banks and may have implications for transmission of monetary policy.

    Keywords: central bank digital currency, banking, money, interbank Market.

    JEL Classification: E42, E52, E58, G21.

No 109

Credit constraints, capital portfolios, and measured productivity

  • Abstract

    We develop a model connecting financial shocks, capital investment decisions by firms, and change in measured aggregate productivity using a dynamic general equilibrium model. Data shows that post the 2008 crisis, firms changed their allocation between assets of varying depreciation rates as credit conditions tightened, which is connected to changes in measured TFP. We propose a model that shows the mechanism of an adverse shock to credit access causing firms to change the balance sheet portfolio composition of productive assets. This reallocation of assets leads to an increase in measured productivity.

    Keywords: Financial crisis, measured productivity, collateral, capital assets, credit constraint.

    JEL Classification: D5, E13, E22, E32, G01, G11, G23.

No 108

Advance Information and Consumption Insurance: Evidence and Structural Estimation

  • Abstract

    We show that advance information on future income can be identified from the correlation between consumption growth and future income growth conditional on current income growth. Employing PSID data, we find that this conditional correlation is positive and significant. We use this evidence to structurally estimate a standard incomplete markets model and discover that US households possess enough advance information to reduce their income forecast errors by 15%. This significantly affects the measurement of consumption insurance. With advance information, 25% more income shocks pass through to consumption on average, and more than twice as much for the 5% asset poorest.

    Keywords: income risk, advance information, consumption insurance, panel data, incomplete markets.

    JEL Classification: C23, D12, D31, D52, D81, E21, G52.

No 107

School Closures and Implications for Student Outcomes: Evidence from Lithuania

  • Abstract

    This paper studies the effect of school closure on student outcomes in the Lithuanian context. Using administrative student-level data over 2013–2017 and propensity score matching, we create a balanced sample of control and treatment groups. In contrast to other studies, we focus on students in the final years of high school, possibly eliciting the upper bar of the disruption effect. Also, we follow students after high school graduation, providing evidence on labor market outcomes. We find that the school closure effect depends on the main teaching language. If we match students on a large set of student and school characteristics but the main teaching language, school closings have a lasting negative effect on exam performance and enrolling in higher education. Matching students on the main teaching language significantly reduces the negative school closure effect, suggesting that the disruption effect is considerably smaller and also has limited outcomes after high school if we take the main teaching language into account.

    Keywords: School closure, education finance, student outcomes.
    JEL Classification: H52, I22, I24.

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

No 4

Implementation of international sanctions in financial institutions

  • Abstract

    In carrying out, within its competence, risk-based supervision of FMPs, the Bank of Lithuania notes that FMPs do not always pay appropriate attention to the implementation of international sanctions and restrictive measures and that FMPs face difficulties in the implementation of international sanctions and restrictive measures in practice. In this Review of the Implementation of International Sanctions in Financial Institutions (hereinafter – the Review), the Bank of Lithuania provides key insights into the measures taken by FMPs to implement international sanctions and restrictive measures.

    The Review is based on the provisions of legal acts and good practices of the EU and the Republic of Lithuania, Analysis of the International Sanctions Screening Systems conducted by the Bank of Lithuania over 20 FMPs (banks, electronic money institutions, payment institutions) in December 2021–May 2022 (hereinafter – the Analysis), contains examples of good practice identified during the Analysis and cases where the measures applied to implement international sanctions need to be improved.

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