Publications

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

We study a model of strategic informed traders submitting market orders together with noise traders where an uncertainty over the overall participation of strategic and noise traders leads to an uncertainty over market depth. Our analysis compares the main case with such uncertainty with the benchmark case without it. When liquidity is driven by informed trading (noise trading), expected trading volume is higher (lower) and expected price informativeness is lower (higher) in the main case compared with the benchmark case. We also analyze the effects of random variation of the aggregate participation, which confound the effects of market expansion and thereby possibly lead to higher expected trading volume and lower expected price informativeness following market expansion. Further, these results can explain a negative volume-volatility relation and a negative impact of transparency reforms on price informativeness.

Keywords: Market depth, liquidity, trading volume, price informativeness

JEL codes: D82; G14

The recent surge in inflation hit Lithuania with a 20 percent increase in 2022, affecting many households. This paper examines the heterogeneous wealth effects of the recent inflation surge in Lithuania. Specifically, I consider different channels – wealth, income, and consumption – but also the monetary and fiscal policy responses to the inflationary shock. I quantify these channels by using data from the Household Finance and Consumption Survey (HFCS). The results show that the consumption channel affected all households similarly, while the income channel disproportionately affected low-income and elderly households. Moreover, the impact of inflation was closely related to households’ net nominal wealth position. The wealth channel significantly eroded the wealth of older households but had a positive impact on younger households, especially those with mortgages. Fiscal policy adjustments partially mitigated the impact of inflation on the most vulnerable households. Meanwhile, the monetary policy response helped offset losses for households with substantial nominal asset holdings. In addition, all these channels influenced changes in wealth inequality in the country. While aggregate wealth inequality remained broadly unchanged, distributional effects showed a decrease in inequality measures for renters and a slight increase for homeowners and mortgage holders.

JEL codes: D15, E21, E5, G51

Using Social Security records between 2000 and 2020, we provide a comprehensive analysis of
labor earnings inequality and its dynamics over the course of Lithuania’s economic development.
Since 2000, there has been a substantial decline in earnings inequality, largely driven by the rapid
growth of earnings at the bottom of the distribution, while earnings volatility has hardly changed.
Importantly, we estimate a relatively high sensitivity of earnings growth to changes in real GDP,
which declines with the level of permanent income. Additionally, we find that the idiosyncratic
earnings risk of individuals at the bottom of the permanent income distribution is less sensitive to
aggregate growth than that of individuals in the top half. Taken together, our findings underscore
that analyzing earnings risk is critical to properly understanding the dynamics of inequality and
designing effective policies to address it.

Keywords: Income inequality, income risk, income mobility, administrative data

JEL codes: D31, E24, J31

In order to assess the implementation of requirements for disclosing sustainability indicators (for 2023) were implemented in the market in 2024, a follow-up study on the analysis/overview of the disclosure of non-financial information (sustainability-related information) under Article 8 of the Taxonomy Regulation was carried out for listed issuers (non-financial undertakings) that are under a statutory obligation to disclose sustainability-related information and have provided this information on a voluntary basis.

As in previous years, the overview analysed the non-financial information of 14 issuers (non-financial undertakings) disclosed in accordance with the requirements of the Taxonomy Regulation. 14 of them were large companies subject to this disclosure obligation, while one company disclosed indicators on a voluntary basis. In addition, the results were compared with last year’s data to assess progress and developments.

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

Available only in Lithuanian

In this paper we propose a parsimonious way of combining survey expectations with empirical models to produce forecasts. We do so by augmenting a traditional vector autoregression model with forecasts for different variables and horizons from the ECB Survey of Professional Forecasters. The additional information improves estimation efficiency while maintaining a treatable model. In terms of forecasting performance, the gains from adding survey forecasts are greater at the one and two year ahead horizons, while they are limited at shorter horizons (below one year). Larger gains are found in terms of density performance than in terms of point. Forecasts of real GDP growth benefit the most from survey information, whereas inflation forecasts are improved the least. This latter result is partially driven by the very poor performance of SPF during the 2022 high inflation period. Forecasts for unemployment also benefit from including expectations for GDP and inflation, although not during the COVID pandemic period.

Keywords: Expectations, Forecasting, Judgement, Survey of Professional Forecasters

JEL codes: C32, C33, C51, D84, E37

We study the welfare implications of distortions, such as markups and returns to scale, when firm entry is slow to adjust, allowing quasi-rents to persist for longer. First, we present evidence on differences in speed of firm entry adjustment across US industries. In some industries, such as hospitality, firms respond rapidly to profit opportunities, arbitraging quasi-rent quickly. Whereas, in other industries, such as construction, entrants respond slowly, sustaining incumbents’ quasi-rents for longer. We develop a model of sluggish firm adjustment, which shows that the sluggishness of firm adjustment magnifies the welfare costs of distortions. We study a model with a fixed cost and increasing marginal cost such that a perfectly competitive equilibrium exists, and in the absence of distortions market and planner equilibrium coincide with firms operating at minimum efficient scale. We contrast outcomes when there is curvature on the demand-side of the economy from markups and curvature on the supply-side of the economy from returns to scale, adding counter-evidence to the perception that the setups are isomorphic.

Keywords: Markups, Firm Entry, Returns to Scale, Welfare

JEL codes: E32, D21, D43, L13, C62

This paper introduces the Systemic Risk Modelling System (SRMS), a new macroprudential stress testing model for the Lithuanian banking sector. The SRMS addresses the limitations of traditional static models by incorporating dynamic balance sheet assumptions and capturing second-round effects, providing a more comprehensive assessment of systemic risks. The model’s applications extend beyond stress testing, including macroprudential policy stance assessment, capital-at-risk analysis, and macroprudential policy impact evaluation. The SRMS model enhances the understanding of systemic risks within the Lithuanian banking sector and offers a potential benchmark for other national central banks seeking to strengthen their financial stability frameworks.

Keywords: macroprudential stress testing, macroprudential policy, feedback loop, secondround effects.

JEL codes: E37, E58, G21, G28

This paper estimates high-dimensional fixed effects models using detailed administrative data to characterize the public-private wage gap in Lithuania between 2010 and 2020. We document that public sector employees earn on average 10% more than their private sector counterparts. However, when comparing firm-specific wage effects, the gap almost disappears, with public sector employers paying a 0.3% lower premium. Interestingly, women benefit from working in the public sector, as they have a 16% premium due to both being employed by organizations with higher premiums and having higher returns to individual-specific components relative to women in private firms. In contrast, men have higher returns to unobserved permanent heterogeneity, which are particularly high for public sector workers, but they are with employers that have lower premiums relative to men in the private sector, resulting in an observed public sector premium of 4%. Our results highlight the importance of using mobility across firms, not just across sectors, and of isolating firm-specific wage components from other sources of wage variation to properly understand pay differentials across employers with different wage-setting protocols.

Financial fraud is a significant issue not only for the financial sector, but also for society as a whole. It is taking on new forms as a result of the increasing digitalisation, with an upward trend in the number of cases and the losses incurred in many countries. In Lithuania, financial fraud has risen dramatically over the last several years.

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 examines the influence of export activity on a firm’s energy intensity, with a particular focus on the role of the upgrading process. We introduce a firm-level complexity index incorporating two dimensions: the complexity of the goods traded, and the complexity of the destination markets served. By employing a quasi-experimental shift-share research design (Borusyak et al., 2022), we show that growth in external demand incentivizes firms to undertake upgrading activities, resulting in lower energy intensity. Furthermore, financial constraints diminish the energy efficiency gains from upgrading, especially for small firms. In addition, we explore whether upgraded firms can leverage higher markups, and show that this strategy is effective only for large firms. These findings indicate the need for targeted support policies for small firms and highlight the critical importance of maintaining open trade in an increasingly fragmented world.

Keywords: Firm Upgrading, International Trade, Energy Intensity, Complexity, Structural Transformation, Economic Development.

JEL classification: F14, D22, O33, Q56.