Publications

The Eurosystem started its asset purchase programme (APP) in March 2015. Net purchases were carried out until the end of 2018, while since the beginning of 2019 only reinvestments are being made. The APP consists of the public sector purchase programme (PSPP), third covered bond purchase programme, asset-backed securities purchase programme and corporate sector purchase programme. The Bank of Lithuania is participating in the PSPP by purchasing Republic of Lithuania government securities (GS), issued in domestic and international markets and debt securities issued by European supranational issuers. Seeking more effective and transparent purchases, the Bank of Lithuania made a decision to purchase domestic Lithuanian GS by implementing reverse auctions. The paper introduces reverse auctions in the context of monetary policy operations, the Bank of Lithuania’s purchase framework of reverse auctions, and examines the purchases of domestic Lithuanian GS by the Bank of Lithuania in the period of March 2015–June 2018.

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

Available only in Lithuanian

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The Great Recession has strongly influenced employment patterns across skill and gender groups. This paper analyzes how the resulting changes in non-employment have affected selection into jobs and hence gender wage gaps. Using data for the European Union, we show that male selection into the labour market, traditionally disregarded, has become positive. This is particularly so in Southern Europe, where dramatic drops in male unskilled employment have taken place during the crisis. As regards female selection, traditionally positive, we document two distinct effects. An added-worker effect has increased female labour force participation and hence reduced selection in some countries. In others, selection has become even more positive as a result of adverse labour demand shifts in industries which are intensive in temporary work, a type of contract in which women are over-represented. Overall, our results indicate that selection has become more important among men and less so among women, thus changing traditional gender patterns and calling for a systematic consideration of male non-employment when studying gender wage gaps.

JEL Codes: J31.

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

In this paper we analyse the price competitiveness of the Italian regions by computing the Real Effective Exchange Rate (REER) for each region, deflated by CPI and vis-à-vis the main partner countries. We use them to look for the medium-term determinants, finding significant heterogeneities in the role of government consumption and investment expenditure. Government consumption has an extremely negative effect on competitiveness in North-Eastern Italy, Southern Italy and Lazio. Investment plays a negative role especially in the North-West, while it can be positive for competitiveness in Lazio and Southern Italy. We also find that the transfer theory does not necessarily hold and it even behaves in the opposite direction in case of North-Eastern Italy and Lazio. Lastly, we show that an increase in the regional price competitiveness influences regional growth positively only in the long run and spillovers may play a role.

JEL Codes: E62, F31, F41, R11.

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

This study develops a symmetric two-country New-Keynesian general equilibrium model with endogenous growth, Calvo-style price and wage rigidities, and international trade of final consumption goods and intermediate goods. The equilibrium implications of two financial market structures are compared: financial autarky and complete markets. In the case of financial autarky, no international bond is traded. In the case of complete markets, the households have access to a full set of international nominal state-contingent bonds. We find that assuming complete markets instead of financial autarky leads to higher co-movement of most macroeconomic growth rates across countries, higher co-movement of inflation rates across countries, lower uncovered interest rate parity regression coefficients, and a lower correlation between exchange rate growth and consumption growth differentials. These results are mostly in line with US and UK data from 1950-2015, which are split into two samples, 1950-1970 and 1971-2015, in order to be compared to the model with financial autarky and the model with complete markets, respectively.

JEL Codes: E30, E44, F44, G12, O30.

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

Euro area countries have experienced profound economic, financial and institutional changes over the last three decades. GDP growth has been very volatile, and very uneven, across countries. Which factors played a role in stirring growth and/or reducing it?  We provide an atheoretical toolkit looking at a large set of real, financial, monetary and institutional variables, as possible factors behind fluctuations and differences in growth rates among euro area countries since 1990. The main outcome stresses the key positive role for long-run growth of higher European institutional integration, overall and for the periphery in specific. This result is robust across specifications and setups. If we split the European institutional integration in its main components, we can see a significant positive role for financial and political integration in the long-run. However the first seems to have beneficial effects for the core only while the opposite holds for the political integration which influences positively the periphery.

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

In this paper we model five Lithuanian HICP subcomponents in a medium scale Bayesian VAR framework. We deal with the parameter proliferation problem by setting the appropriate amount of shrinkage determined in the out-of-sample forecasting exercise. The main body of the paper consists of displaying the model’s performance in two applications: forecasting and analysis of inflation determinants. We find the model’s forecasts to be competitive against the univariate statistical models, particularly in the cases of predicting processed food and energy goods inflation. What is more, exercises based on conditional forecasting show that these two indices make the best use of accurate conditional information in terms of improving predicting accuracy. In the decomposition of the drivers of HICP components, we demonstrate that both, domestic and foreign factors can be prevalent inflation determinants in certain time periods. We also find some evidence on employees’ bargaining power playing a role in determining the Lithuanian consumer price inflation.

JEL Codes: C32, C53, E37.

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

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. 

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. 

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. 

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

Available only in Lithuanian

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

Available only in Lithuanian

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.