Publications

Do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed? Since economic theory usually pays attention to the steady state change and ignores business cycle interactions of structural reforms, we connect local projection methodology with the Mallow’s C_p averaging criterion to arrive at an inference that does not require knowledge of the exact functional form, is robust to mis-specification, admits non-linearities, and cross-sectional dependence and addresses uncertainty regarding interactions between labor reforms and macroeconomy. We also develop a test to check the importance of monetary policy for any horizon and the entire impulse response function, taking the multiple testing problem into account. We document that replacement rates deliver substantially different outcomes on real GDP, inflation and real effective exchange rate, whereas labor activation schemes bear different effects on unemployment in low- and high-interest rate environments. There is also evidence of monetary policy trend playing an important role as well as increasing synchronized monetary and labor market policies across European countries.

JEL Codes: C33, C54, E52, E62, J08, J38.

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

Despite Lithuania’s household income inequality being among the highest in the European Union (EU), little empirical work has been carried out to explain such disparities. In this article, we use the EU Statistics on Income and Living Conditions sample micro data. We confirm that income inequality in Lithuania is high compared to the EU average and find that it is robust to inequality measure or equivalence scale used. We have also decomposed household disposable income inequality by subgroups and factors. We find that the number of employed household members in Lithuania’s households affects income inequality more as compared to the EU. It is related to a larger labour income, and self-employment income in particular, contribution to inequality in Lithuania as opposed to the EU. Moreover, transfers and taxes have a smaller impact on reducing inequality in Lithuania than in the EU.

JEL Codes: D31.

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

This study investigates the direct and intersectoral network effects of idiosyncratic TFP shocks on sectors’ growth in the context of US manufacturing industries. To deal with the potential endogeneity of TFP, we propose a novel set of instruments for contemporaneous regressors. These instruments are technology shocks identified via sign restriction from sectoral SVAR models. Using US input-output tables and industry-level data, we quantify direct and network-based effects of the shocks. Our results show that idiosyncratic technology shocks propagate mostly downstream the network. In addition, we capture strong contemporaneous direct effects of the shocks.

JEL Codes: C36, C67, D24, E32.

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

In this paper, we investigate the Exchange Rate Pass-Through (ERPT) to import and consumer prices in the three Baltic states. We apply reduced form equations first. Then, to look at measures of shock-dependent ERPT, we use Bayesian VARs with zero and sign restrictions and a local projection exercise, using common euro area shocks. We find that results from reduced form equations are in line with the ERPT literature. As for shock-dependent ERPTs, the magnitudes are overall bigger than in the literature in the case of import prices. They get smaller for consumer prices and even smaller if we remove energy and food prices.

JEL Codes: E31, F3, F41.

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

This paper examines the implications of digital currencies – both private cryptocurrencies and central bank digital currencies (CBDCs) – for central banking. We discuss some déjà vu episodes from monetary history in order to obtain a clearer understanding the present and potential implications of these currencies. We find that not only the current limitations of private cryptocurrencies, but also their conceptual underpinnings, argue against their replacement of conventional money. The two main potential problems with broadly accessible (general purpose) CBDC are a digital run and an excessive involvement of a central bank in the funding of the real economy. Meanwhile, alternative reserve-backed accounts or tokens (an implicit CBDC known as Tobin’s alternative) would also be exposed to these problems, albeit in a less pronounced way. CBDC-related hopes for monetary policy to eliminate the effective lower bound constraint are found to be exaggerated, even in a cashless world. We argue that central banks’ response to the digitalisation trend should be an integrative solution which satisfies the public demand for a safe means of payment, safeguards private innovations, and ensures financial stability. We conclude that there is no observable form of CBDC that would serve as a best-choice central bank response in advanced economies. Such a response might be considered as a temporary solution (if any), however, in emerging economies with weak financial inclusion. 

JEL Codes: E51, E58, N20.

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

We use loan-level data and a novel identification setting – closures of banks – to study how forced break-ups of lending relationships affect firms’ borrowing costs. We find that after a financially distressed bank closed and its best borrowers were exogenously forced to switch, their borrowing costs dropped steeply and converged to the market’s average. We document no such effect when a healthy bank closed. This suggests that distressed banks can use informational monopoly power to hold up and exploit their best borrowers. Apparently, closures of such banks can release the best-quality firms from the hold-up and allow borrowing cheaper elsewhere.

JEL Codes: D82, E51, G20, G21, G30, G33, L14.

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

This study investigates the role of intersectoral networks in the transmission of aggregate technology shocks to sectors’ growth. First, we develop a theoretical model to obtain insights into the propagation of shocks through input-output linkages, which suggests that the network effect arises via sectoral downstream linkages. We then quantitatively assess this theoretical implication with US manufacturing industries, where the aggregate technology shocks are derived from a dynamic factor model. We find that aggregate technology shocks lead to an increase in the output growth of the sector, both directly and indirectly via its intersectoral linkages. More interestingly, we document a crucial role of the intersectoral network channel, which contributes about 50 percent of the total effect. In addition, the network-based effect comes mostly from downstream linkages of sectors, which is broadly consistent with theory. 

JEL Codes: E32, C67, C33, L16, D24.

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

This paper investigates the role of international trade in the increase in the employment share of non-tradable sectors (services and construction). Borrowing insights from the vast theoretical literature on the determinants of structural change, we build an empirical model allowing to distinguish between long-run and short-run effects. We use this model to investigate the relative importance of the main traditional demand-side and supply-side channels of structural change, assessing, in this context, the role of trade variables. To this end, we use an unbalanced panel of countries for the period 1960-2011 from the EU-KLEMS and the GGDC 10-sector databases. Our preliminary results suggest that both Engelian income effects, i.e. the so-called demand-side drivers, and relative productivity, i.e. the supply-side channel, are relevant drivers of structural change. We show that the import and export shares are positively and negatively related, respectively, with the employment shifts to non-tradable sectors in the long run, in particular, for mature and transition economies. In the short run, a positive and significant relationship between the import share and structural shifts towards tradable sectors emerges. 

JEL Codes: F1, F4, O1, O4.

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

This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy. 

JEL Codes: D63, E50, E52.

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

In this paper, we develop and describe quarterly data on disaggregated sectors in Lithuania which covers the period 1998-2018. The data is useful for empirical studies requiring panels with a large number of time observations and a large number of cross-sectional units. We follow the NACE2 level of disaggregation in developing our data, thus allowing us to combine the data with world input-output tables which we in turn use to identify the hubs and the main importing and exporting sectors within the economy. The data is then used for forecasting the growth rate of GDP. There is a substantial increase in the degree of covariation among sectoral production growth rates, which is observed using a split sample around 2008. When we apply factor methods, we find that this strong covariation can be explained by a few factors which are closely correlated to the growth of the retail and wholesale sectors. For GDP growth, the forecasts we consider are the diffusion index forecasts produced using a few indexes that summarize sectoral data, and the forecasts produced using the production growth of selected hubs and importing and exporting sectors. We find that the diffusion indexes and the production growth of sectors that make heavy use of imported inputs in their production have interesting forecasting power for the growth rate of GDP in the 2006-2011 and 2012-2018 periods.

JEL Codes: E27, E37, C3, C67.

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

In this paper, we analyze the relationship between various risk factors and euro area government bond yield spreads, focusing particularly on the monetary policy stance. Our results show that credit and common risk factors are consistently priced in government bond yield spreads, while liquidity differentials are relevant especially during periods of stressed market conditions. We demonstrate that the liquidity component has been more prominent during periods of declining interest rates and increasing reserves, while it has diminished on announcement days of monetary policy decisions related to PSPP. Overall, the liquidity component has been statistically insignificant since the announcement of accommodative non-standard monetary policy measures.

JEL Codes: C23, E62, H50.

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

The power of Granger non-causality tests in panel data depends on the type of the alternative hypothesis: feedback from other variables might be homogeneous, homogeneous within groups or heterogeneous across different panel units. Existing tests have power against only one of these alternatives and may fail to reject the null hypothesis if the specified type of alternative is incorrect. This paper proposes a new Union-Intersections (UI) test which has correct size and good power against any type of alternative. The UI test is based on an existing test which is powerful against heterogeneous alternatives and a new Wald-type test which is powerful against homogeneous alternatives. The Wald test is designed to have good size and power properties for moderate to large time series dimensions and is based on a bias-corrected split panel jackknife-type estimator. Evidence from simulations confirm the new UI tests provide power against any direction of the alternative.

JEL Codes: C13, C33.

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