Bank of Lithuania
Category
Series
Topic
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Year
All results 219
No 55
2018-12-21

How much do households really know about their future income?

  • Abstract

    We develop a consumption-savings model that distinguishes households’ perceived income uncertainty from income uncertainty as measured by an econometrician. Households receive signals on their future disposable income that can drive a gap between the two uncertainties. With an uncertainty gap that is consistent with direct estimates stemming from subjective income expectations, the model jointly explains three consumption inequality and insurance measures in US micro data that are not captured without the difference: (i) the cross-sectional variance of households’ consumption, (ii) the covariance of current consumption and income growth and (iii) the income-conditional mean of household consumption.

    JEL Codes: E21, D31, D52.

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

No 54
2018-11-30

Public insurance of married versus single households in the US: trends and welfare consequences

  • Abstract

    Using the March Current Population Survey, I show that over the last two decades, married households in the United States received increasingly more public insurance against labor income risk, whereas the opposite was true for single households. To evaluate the welfare consequences of this trend, I perform a quantitative analysis. As a novel contribution, I expand the standard incomplete markets model à la Aiyagari (1994) to include two groups of households: married and single. The model allows for changes in the marital status of households and accounts for transition dynamics between steady states. I show that the divergent trends in public insurance have a significant detrimental effect on the welfare of both married and single households.

    JEL Codes: D52, D60, E21, E62, H31.

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

No 53
2018-11-19

Bank risk-taking and misconduct

  • Abstract

    This paper studies bank misconduct using a novel dataset on malpractice that resulted in conduct costs in a sample of 30 financial institutions during 2000-2016. It shows that misconduct has been prevalent over the sample period and that its intensity varies over the business cycle. Furthermore, the initiation of misconduct is related to bank remuneration schemes, increasing with CEO bonuses in periods of high economic growth and when bank leverage is high. To provide a possible explanation for the observed dynamics, the paper builds a theoretical model in which misconduct is linked to bank risk-taking. There, the implementation of profitable but risky projects requires more aggressive pay structures, in turn increasing managers’ incentives to engage in other activities that boost short-term returns. The findings have implications for regulation aimed at preventing malpractice in financial institutions.

    JEL Codes: G21, G28.

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

No 23
2018-11-14

The 2018 tax and pension reform: Main changes and the medium-term macroeconomic impact

  • Abstract

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


    Available only in Lithuanian

No 22
2018-11-14

The Basel Committee on Banking Supervision 2017 Basel III Reform’s Review and Impact on European Union Banks’ Capital

  • Abstract

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


    Available only in Lithuanian

No 52
2018-10-26

Bank credit and money creation in a DSGE model of a small open economy

  • Abstract

    From the bookkeeping perspective, the flipside of bank loan issuance is a simultaneous creation of a deposit in the borrower’s account. By the act of lending banks do not simply intermediate pre-accumulated real resources but rather create new financial resources (money in the form of deposits) and new purchasing power. Being a major driver behind money growth, bank credit directly fuels domestic demand and inflationary pressures and thus needs to be modelled as a monetary phenomenon rather than as a mere reallocation of real resources. To this end, we develop a simple DSGE model and show that the basic DSGE framework, representing an open flexible-price economy with savers and borrowers and a simple bank with an explicit balance sheet, can indeed capture the essence of a bank as a monetary institution. The theoretical model confirms that the financial system is highly elastic in a sense that banks can extend loans at will largely irrespective of pre-accumulated resources and without needing to raise nominal deposit rates or increase financing from abroad. Moreover, in our model, changes in bank credit do have an immediate impact on nominal incomes, domestic demand and real economic activity. Model results are highly relevant from the policy perspective because they explain the fundamental relationship between financial (credit) cycle and the business cycle (e.g. observed income growth can be a consequence of a credit boom) and also suggest that sound domestic banks can stimulate domestic demand and can effectively reduce the developing economy’s reliance on foreign financing. Notably, the model focuses on a small open economy – a member of a monetary union – which thus has no independent monetary policy. We calibrate the model to the Lithuanian data and perform a number of policy-relevant shock experiments.

    JEL Codes: E30, E44, E51, G21.

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

No 51
2018-08-29

A century of gaps

  • Abstract

    This paper considers the role of financial information in the estimation and dynamics of the US output gap over more than a century. To this end, we extend the parsimonious approach of Borio, Disyatat, and Juselius (2016, 2014) to allow for time-varying effects of financial factors. This novel feature significantly improves real-time estimates of the output gap. It signals the peak and trough in economic activity related to both the Great Recession and the Great Depression. Two major insights follow. Credit dynamics are the primary drivers of the observed financial crisis, albeit with different conduits over the century: the stock market in 1929 and the housing market in 2008. Accounting for credit growth, the US potential growth has been stable at 2% since the beginning of 1980. 
     
    JEL Codes: C11, C32, E32, O47.
     
    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania. 
     
     
No 50
2018-07-30

Term premium and quantitative easing in a fractionally cointegrated yield curve

  • Abstract

    The co-movement of US sovereign rates suggests a long-run common stochastic trend. Traditional cointegrated systems need to assume that interest rates are unit roots and thus imply non-stationary and non-mean-reverting dynamics. Based on recent econometric developments, we postulate and estimate a fractional cointegrated model (FCVAR) which allows for a mean-reverting stochastic trend. Our results point to the presence of such mean-reverting fractional cointegration among sovereign rates. The implied term premium is less volatile than the classic I(0) stationary and I(1) unit root models. Our analysis highlights the role of real factors (but not inflation) in shaping term premium dynamics. We further identify the dynamic effects of quantitative easing policies on our identified term premium. In contrast to the stationary-implied term premium, we find a significant term premium decline following these large-scale asset purchase programs.

    JEL Codes: C2, C3, E4, G1.

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

No 9
2018-06-28

Global temperature, R&D expenditure, and growth

  • Abstract

    We shed new light on the macroeconomic effects of rising temperatures. In the data, a shock to global temperature dampens research and development (R&D) expenditure growth. This novel empirical evidence is rationalised within a stochastic endogenous growth model. In the model, Temperature shocks undermine economic growth via a drop in R&D. Moreover, temperature risk generates welfare costs of 13.50% of lifetime utility. The government can offset these welfare costs by subsidizing investment with 1.02% or R&D expenditure with 0.52% of total public spending, respectively. Alternatively, it can levy a lump-sum tax on households which finances 0.64% of total public spending.

    JEL Codes: E30, G12, Q00.

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

No 8
2018-06-20

Network constrained covariate coefficient and connection sign estimation

  • Abstract

    Often, variables are linked to each other via a network. When such a network structure is known, this knowledge can be incorporated into regularized regression settings. In particular, an additional network penalty can be added on top of another penalty term, such as a Lasso penalty. However, when the type of interaction via the network is unknown (that is, whether connections are of an activating or a repressing type), the connection signs have to be estimated simultaneously with the covariate coefficients. This can be done with an algorithm iterating a connection sign estimation step and a covariate coefficient estimation step. We show detailed simulation results of such an algorithm. The algorithm performs well in a variety of settings. We also briefly describe the R-package that we developed for this purpose, which is publicly available.

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

No 7
2018-05-14

Firm heterogeneity and macroeconomic dynamics: a datadriven investigation

  • Abstract

    In this paper we offer a unique firm-level view of the empirical regularities underlying the evolution of the Lithuanian economy over the period of 2000 to 2014. Employing a novel data-set, we investigate key distributional moments of both the financial and real characteristics of Lithuanian firms. We focus in particular on the issues related to productivity, firm birth and death and the associated employment creation and destruction across industries, firm sizes and trade status (exporting vs. non-exporting). We refrain from any structural modeling attempt in order to map out the key economic processes across industries and selected firm characteristics. We uncover similar empirical regularities as already highlighted in the literature: trade participation has substantial benefits on firm productivity, the 2008 recession has had a cleansing effect on the non-tradable sector, firm birth and death are highly pro-cyclical. The richness of the dataset allows us to produce additional insights such as the change in the composition of assets and liabilities over the business cycles (tilting both liabilities and assets towards the short-term) or the increasing share of exporting firms but the constant share of importing ones since 2000.

    JEL Codes: D22, D24, E30, J21, J24, J30, L11, L25.

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

No 6
2018-05-04

Network-based macro fluctuations: Evidence from Lithuania

  • Abstract

    Do inter-sectoral linkages of intermediate products affect the spread of sectoral shocks at the aggregate level in Lithuania, a small and open economy? We answer this question by: i) constructing the domestic sector-by-sector direct requirements table using the Lithuanian interindustry transactions tables, and ii) applying Acemoglu et al. (2012)'s network-based methodology and Gabaix and Ibragimov (2011)'s modified log rank-log size regression to analyse the nature of inter-sectoral linkages. Our results indicate that the direct and indirect inter-sectoral linkages cause aggregate volatility to decay at a rate lower than √n - the rate predicted by the standard diversification argument. Furthermore, indirect linkages play an important role in the above-mentioned process, supporting the findings of Acemoglu et al. (2012). These results suggest that the inter-sectoral network of linkages represent a potential propagation mechanism for idiosyncratic shocks throughout the Lithuanian economy.

    JEL Codes: C13, C46, C67, E00.

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

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