Publications

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This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.

JEL Codes: C38, E31, F31.

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

Non-technical summary (26.5 KB download icon)

In this paper, we develop a two-country monetary union new Keynesian general equilibrium model with housing and collateral constraints, to be calibrated for Lithuania and the rest of the euro area. Within this setting, and following the recent entrance of Lithuania in the EMU, the aim of this paper is twofold. First, we study how shocks are transmitted differently in the two regions, considering the recent common monetary policy. Then, we analyze how macroprudential policies should be conducted in Lithuania, in the context of the EMU. As a macroprudential tool, we propose a decentralized Taylortype rule for the LTV which responds to national deviations in output and house prices. We find that, given the housing market features in Lithuania, common shocks are transmitted more strongly in this country than in the rest of the euro area. In terms of macroprudential policies, results show that the optimal policy in Lithuania with respect to the euro area may have a different intensity and that it delivers substantial benefits in terms of financial stability.

JEL Codes: E32, E44, F36.

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

Each time researchers jointly write an article, a decision must be made about the order in which the authors are listed. There are two main norms for doing so. The vast majority of scientific disciplines use a contribution-based norm according to which authors who contributed the most are listed first. Very few disciplines, most notably economics, instead resort primarily to the norm of listing authors in alphabetical order. It has been argued that (i) this alphabetical norm gives an unfair advantage to researchers with last names starting with a letter early in the alphabet and that (ii) researchers are aware of this “alphabetical discrimination” and react strategically to it, for example through avoiding collaborations with multiple others. This article surveys the empirical literature on these two related topics. Overall, there is convincing evidence that alphabetical discrimination exists and that researchers react to it.

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

We extend OGRE, the overlapping generation model developed by Baksa and Munkacsi (2016) by adding openness. We then employ the model to explore how the macroeconomic effects of aging, assumed to manifest itself as a decrease in the mortality rate, can be counteracted through public policies. The extended version inherits the previous modelling features of OGRE allowing us to also account for the impact openness has on the effectiveness of the considered policies.

JEL Codes: E24, E26, F41, H55, J11, J46.

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

This paper builds a theoretical model that introduces frictional unemployment in a two-sector multi-worker heterogeneous firms model with a dynamic matching process. In doing so, we have a rich environment that combines product, labour, and international markets. A change in labour market policies (unemployment benefits and employment contingent subsidies) transforms the share of exporters and affects average productivity. Empirical evidence confirms a robust positive effect of employment subsidies on openness, little, if any, impact of subsidies and a positive effect of replacement rate on unemployment. Closure of equilibrium plays an important role to explain data facts about employment subsidies: using sectoral arbitrage condition, subsidies cease affecting unemployment and make openness grow, consistently with the empirical evidence. Unemployment benefits, on the other hand, make unemployment and openness rise, independently of sectoral reallocations. In addition, we find that unemployment benefits bear different policy implications with regards to international coordination than employment subsidies.

JEL Codes: E24, F12, F16.

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

This paper deals with the macroeconomic responses to labour market reforms; something of utmost importance in times of monetary policy reaching its limits to affect real economy. We shed more light on the plausible macroeconomic reactions to the ex ante (planned but not implemented yet) reforms in the labour market, taking a currently proposed Social Model in Lithuania as an example. Not only contributing to the current debate on the efficacy of announced structural reforms, we also add to the literature on policy evaluation by assessing reforms from a global perspective. Omission of an international dimension could lead to seriously biased results on policy effects for any open and small economy. Taking trade connectivity and openness into account, we demonstrate macroeconomic reactions to shocks in unemployment benefits, active labour market policies, and tax wedge on the reforming economy. We contrast the results with the approach when global interdependencies are ignored – still a standard practice. Using a satellite model for the intermediate trade, we link the global framework with the sectoral extensive margin, which changes some of the initial findings. A discussion on counterfactuals, which use both cross-sectional and temporal dimensions to tackle anticipation effects, is also presented.

JEL Codes: C33, C54, E62, J38.

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

Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic effects of public old-age pension reforms and other fiscal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main finding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.

JEL Codes: E24, E26, H55, J11, J46.

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

In this paper we present the structure of OGRE, a dynamic general equilib-rium model with overlapping generations, unemployment and a shadow economy. Based on a parametrized version of the model, we examine the impacts of aging and calculate multipliers of public pension and other fiscal policies. Also, we contrast macroeconomic reactions with pay-as-you-go and fully funded pension plans. Lastly, we highlight the role of unemployment and that of the underground sector in the framework.

JEL Codes: E24, E26, H55, J11, J46.

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

In this paper, we look at the determinants of current accounts in twenty-seven EU countries over the period 1994-2014. The twenty-seven countries of interest are divided into three sub-groups, namely: core, periphery and CEE new member states. We also assess the current accounts based on computed equilibrium values, and we provide a measure of misalignment for the medium run. As determinants we include capital flows as well as demographic, fiscal and relative development factors. The initial Net Foreign Asset position and oil balance seem to matter more in the core countries than in the periphery and CEE new member states. In contrast, the periphery and CEE new member states seem to be more strongly affected by capital flows. Fiscal balance negatively affects only the periphery, while an increase in government spending is positive for the current account for CEE new member states. In the past twenty years these misalignments have shown a cyclical behaviour in most EU countries, and the magnitude of the cycles themselves are highly heterogeneous across groups. Lastly, we compute an adjusted current account equilibrium, which tries to correct the equilibrium value by the role of expectations (proxied by IMF projections). This factor has more of an impact in the UK than in the euro-area countries.

JEL Codes: F32, F31, C33.

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

The experimental literature on asset markets has provided many useful insights on the efficiency of market mechanisms. It is unclear whether these results carry over to bonds markets, however. An important feature of bond markets is the relationship between initial public offering (IPO) prices and the probability that the bond issuer will default. First, this probability affects the value of the bond and, therefore, the bond prices. Second, prices paid for the bonds in the IPO determine the bond issuer’s financing costs and, therefore, affect the probability that the bond issuer defaults. We develop a flexible bond market model that accounts for this two-way interaction and that is easily implemented in the laboratory. We examine how subjects price bonds in this setting and find that subjects learn to price bonds rather well after only a few repetitions (both during the IPO and while trading in the secondary market afterward). Bubbles in bond prices are only observed among inexperienced traders. The overall high degree of market efficiency that we find occurs in environments with both increasing and decreasing (equilibrium) fundamental values for bonds.

JEL Codes: C92, C90, D47, G12.

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

Also published in the Journal of Economic Dynamics and Control, Volume 78, Pages 118–148

This paper studies a two-country production economy with complete and frictionless financial markets and international trade in which competition in R&D leads to endogenous new firm creation and economic growth. Current monopolists (“incumbents”) and potential new firms (“entrants”) compete in developing patents domestically. These innovative firms use both consumption goods in their R&D technologies to capture international technological spillovers. In the model specifi- cations with technology spillover one obtains that (i) the cross-country correlation of consumption growth is lower than the one of output growth; (ii) net exports are negatively correlated with output; (iii) the model matches the high co-movement of stock returns across countries. Furthermore, heterogeneity in the R&D technology bundle home bias parameters for incumbents and entrants enables the model to replicate the empirically rather moderate correlation between the R&D innovation probabilities of incumbents and entrants within a country. Moreover, the model produces a positive value premium. Finally, the exchange rate volatility is decreasing in the amount of technology spillovers.

JEL Codes: E22, F31, G12, O30, O41.

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

This paper studies the link between demographic factors and labour shares as well as tries to answer the question whether population ageing is responsible for the global decline in labour shares. We found that the link depends on the elasticity of substitution between labour and capital as production factors. Given the empirical estimates of this parameter, we conclude that population ageing is not responsible for the global decline in labour shares. On the contrary, it reduces the speed of this decline.

JEL Codes: E25, C51, J14.

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