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This paper presents an account of the monetary policy stance for euro area countries from 1999 to the beginning of the crisis in 2008. The analysis starts with the derivation of a synthetic index measuring the average tightness of monetary policy across euro area members. The index is constructed using pseudo-Taylor residuals, obtained from an estimated monetary policy rule for the whole euro area and country specific fundamentals. This measure is then decomposed to disentangle the role of inflation and fundamental economic dynamics. Results suggest that there were significant differences in monetary policy stance across euro area members over the period considered. Such differences are primarily driven by wedges in price dynamics, most of which are disconnected from real economic activity.

JEL Codes: E52, E58, E61.

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

In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency.
We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments.
In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.

JEL Codes: F31, F43, C23.

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

The term ‘financialization’ describes the phenomenon that commodity contracts are traded for purely financial reasons and not for motives rooted in the real economy. Recently, financialization has been made responsible for causing adverse welfare effects especially for low-income and low-wealth agents, who have to spend a large share of their income for commodity consumption and cannot participate in financial markets. In this paper we study the effect of fi- nancial speculation on commodity prices in a heterogeneous agent production economy with an agricultural and an industrial producer, a financial speculator, and a commodity consumer. While access to financial markets is always beneficial for the participating agents, since it allows them to reduce their consumption volatility, it has a decisive effect with respect to overall welfare effects who can trade with whom (but not so much what types of instruments can be traded).

JEL Codes: E23, G12, G13, Q11, I30.

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

In this paper we study the effect of a (standard) monetary policy shock in the euro area on the Lithuanian economy. For this purpose we employ a structural vector autoregressive (SVAR) model incorporating variables from both, the euro area and Lithuania. We identify the system using short-term zero restrictions. The model exhibits a block exogenous structure to account for the fact that Lithuania is a small economy and Lithuanian macro variables do not have a significant effect on the euro area variables. In general, we find that a monetary policy shock in the euro area has a stronger effect on the Lithuanian economy than it does on the euro area economy, though the effects are not significant, preventing firm conclusions. We further broaden our analysis employing a panel VAR model for the three Baltic states. This allows us to not only explore the time variation of the euro area monetary policy transmission in the Baltics, but also helps to verify our initial results. The effects are stronger when estimated using the panel VAR model.

JEL Codes: C32, C33, E52.

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

This paper provides an explanation as to why population ageing is associated with deflationary processes. For this reason we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model with post-Keynesian monetary theory. The model links demographic factors such as fertility rates and longevity to prices. We show that lower fertility rates lead to smaller demand for credits, and lower money creation, which in turn causes a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed; they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.

JEL Codes: E12, E31, E41, J10.

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

We extend the endogenous growth model of Kung and Schmid (2015) by adding endogenous labor dynamics and wage rigidities. This leads to an increase of about 250 basis points in risk premia. Additionally, it brings labor market quantities much closer to their empirical counterparts. In particular, wage rigidities generate an increase of around 60 basis points in labor growth volatility.

JEL Codes: E22, G12, O30, O41.

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

Based on survey data covering 6,429 firms in 10 Central and Eastern European countries we examine the impact of the banking sector environment, as well as the institutional and regulatory environment, on credit constrained firms. We find that small and foreign-owned firms are less likely to demand credit compared to audited and innovative firms. On the other hand, small, medium, publicly listed, sole proprietorship and foreign-owned firms had a higher probability of being credit constrained in 2008-2009 than in 2012-2014. The banking sector's environment analysis reveals that firms operating in more concentrated banking markets are less likely to be credit constrained. However, higher capital requirements, increased levels of loan loss reserves and a higher presence of foreign banks have a negative impact on the availability of bank credit. The evaluation of the institutional and regulatory environment in which firms operate shows that credit information sharing is negatively correlated with access to credit. Furthermore, we show that banking sector contestability can mitigate this negative effect. Finally, we find that in a better credit information sharing environment, foreign banks are more likely to provide credit.

JEL Codes: E51, G21, F34, L10.

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

We built different financial cycle measures, also applied recently in Comunale and Hessel (2014).
Our aim is to provide a comprehensive database with definitions of variables that may be of use for crosscountry comparative analysis.
The database includes 41 countries (EU28 and OECD members) from 1994 to 2014 with both annual and quarterly frequency.
The main contributions of our database are that: i) it is publicly available and freely downloadable from the website of the Bank of Lithuania and it can be used subject to a clear reference; ii) the data are updated to the most recent year/quarter available; ii) considers not only the EU members as of 2014 (Croatia is therefore included in the sample), but also other non-EU countries part of the OECD (including both advanced and developing economies); iii) is built using both HP filtering techniques and the Principal Component Analysis (PCA), the latter are used to compute synthetic indices, to come up to different applicable indicators; iv) we added also some business cycle measures for comparison reason.
Ultimately, we show an application of our data, checking whether the financial cycle can influence the estimation of inflation in the euro area and what is the difference between adding a business or a financial cycle measure for the exchange rate pass-through (ERPT). We find that the ERPT can be higher in the presence of house price fluctuations at the frequency of the financial cycle. 

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.

Appendix (6.9 MB download icon)

Recent turbulent times have once again demonstrated how important flexible product and labour markets are to dampen the effects of adverse economic shocks. A number of labour market reforms have been implemented to enhance economic resilience and flexibility. However, accounting for the efficacy of policy interventions requires going beyond national boundaries and evaluating international interactions and global interdependencies, which may strengthen or weaken economic responses. Concentrating on open European economies, this paper deals with labour market institutions and structural reforms in a general equilibrium framework, which allows to analyse the intricate connections between labour policy choices and international trade (openness), paying special attention to labour market policy shocks. Amid discussions about a fiscal union in Europe, we empirically demonstrate that labour market policies can have positive and negative spillovers to trading partners, thereby calling for coordinated policies within a trading bloc. We answer three types of questions: what would have happened had all economies implemented structural labour market reforms simultaneously? How heterogeneous are responses in a single economy to shocks conducted in every other country? Relatedly, how heterogeneous are responses by all economies to a reform in one given economy?

JEL Codes: C32, C33, 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 gives a broad descriptive overview on wage and price setting behaviour of Lithuanian firms during the last episode of the economic crisis in 2008–2009 and in the post-crisis period of 2010–2013. The evidence provided in this paper is based on the firm-level data from the third wave of the Wage Dynamic Network (WDN3) survey — the joint research project of the European Union (EU) countries launched within the European System of Central Banks (ESCB). Wage and price setting strategies of Lithuanian firms were evaluated by relating firms’ decision-making to the macroeconomic, financial and institutional environment under which the firms are operating. The preliminary conclusion drawn in this paper is that both wages and prices show rather high degree of flexibility in Lithuania. Low wage rigidity should primarily be attributable to labour market institutions — low collective wage bargaining coverage and completely decentralised wage setting process. Easing of employment protection laws during the last episode of economic downturn might also have contributed to the increased wage flexibility in the after-crisis period.

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

Following the IMF CGER methodology, we conduct an assessment of the current account and price competitiveness of the Central Eastern European Countries, CEECs, which joined the EU between 2004 and 2014. We present results for a method called the “Macroeconomic Balance (MB) approach” which provides a measure of current account equilibrium based on its determinants together with misalignments in the real effective exchange rates. We believe that a more refined analysis of the misalignments may be of some use for the Macroeconomic Imbalance Procedure (MIP). This is especially useful for these countries which went through a transition phase and boom/bust periods since their independence. This can have influenced their performances and a judgement based on their own characteristics may be needed.
We use a panel setup of 11 EU new member states (Croatia is included) over the period 1994-2012 in static and dynamic frameworks, also controlling for the presence of cross-sectional dependence, checking specifically for the role of exchange rate regimes, capital flows and global factors.
We find that the estimated coefficients for the determinants are in line with the expectations. Moreover, the foreign capital flows, the oil balance and relative output growth seem to play a crucial role in explaining the current account. Some global factors like shocks in oil prices or supply might have played a role in worsening, the current account balance of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in line with the current account gaps, which experience a clear cyclical behaviour. The CAs and REERs are getting close to equilibria in 2012 in most of the countries. The rebalancing is completed for some countries less misaligned in the past like Poland and Czech Republic, but also in the case of Lithuania. When the Foreign Direct Investments (FDIs) are introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments); while the negative misalignments are smaller in magnitude.

JEL Codes: F31, F32, C23.

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

The central question of this paper is how international trade and specialisation are affected by different designs of pension schemes and asymmetric demographic changes. In a model with two goods, two countries and two production factors, we find that countries with a relatively large unfunded pension scheme will specialise in the production of labour intensive goods. If these countries are hit by a negative demographic shock, this specialisation will intensify in the long run, which is contrary to the prediction of the classical Heckscher-Ohlin-Samuelson model. Eventually, these countries may even completely specialise in the production of those goods. The effects spill over to other countries, which will move away from complete specialisation in capital intensive goods as the relative size of their labour intensive goods sector will also increase. 

JEL Codes: E27, F16, H55, J19.

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