Bank of Lithuania
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Series
Topic
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All results 219
No 45
2017-06-23

The knotty interplay between credit and housing

  • Abstract

    We employ the recent Jordà et al. (2016) and Knoll et al. (2017) datasets to investigate the long-run relationship between house prices and credit volume, allowing for interest rate, real exchange rate and real gross domestic product (GDP). We refine the analysis using more recent data at the quarterly-level to define relevant co-integrating relationships across a number of European economies. Housing, GDP and credit cross-sectional averages are included in the analysis to detect potential spill-over effects. Empirical results indicate cross-country heterogeneities and an uneven feedback mechanism between credit and housing – the full loop is established only for several countries in the dataset. Important results relate to the statistical properties of the housing time series. Grouping countries for panel-like econometric exercises may lead to spurious regression results, poor inference and misleading policy implications. Short-run dynamics, compared to the long-run may often lead to contradicting policy advice if the order of integration of the house price series is not properly accounted for. Accounting for spatial patterns of house prices which cannot be attributed to global output shocks may provide useful insights into policy making.

    JEL Codes: C21, E51, O18, R31.

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

No 44
2017-04-24

Personal bankruptcy, bank portfolio choice and the macroeconomy

  • Abstract

    This paper explores the spillover effects from increasing personal bankruptcy protection. Innovatively, the paper shows that the spillover effects can be influenced by the bank portfolio choice. Since a low level of personal bankruptcy protection keeps an insolvent individual liable until her debt is repaid in full, lender’s returns on mortgages are less uncertain than returns on other assets ceteris paribus. Risk-averse banks would prefer mortgages over other types of assets such as corporate loans. Corporate lending and thus equilibrium output would fall. In contrary to the popular view that creditor protection smooths credit provision and makes the allocation of resources more efficient, I show that in some cases a low level of personal bankruptcy protection can lead to aggregate consumption losses. Also I show that macroprudential policies (LTV ratios) can successfully complement higher personal bankruptcy protection in ensuring even higher welfare.

    JEL Codes: E44, G11, G21, K35, R21.

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

No 4
2017-04-24

Unemployment or credit: Who holds the potential? Results from a small-open economy

  • Abstract

    This paper investigates the importance of unemployment and credit in determining the potential level of real activity for a small-open economy with a low degree of financialization. We estimate a multivariate unobserved component model (MUC) to derive the potential output and its associated output gap for the Lithuanian economy. The model is estimated via Bayesian methods and the time-paths of unobserved variables are extracted via the Kalman filter. We find that the inclusion of unemployment into the MUC model substantially improves the estimates of output gap in real-time. Once information about unemployment is accounted for, adding information about credit does not substantially alter either the estimates of output gap or its performance in real time. We uncover a strong negative correlation between the model-implied unemployment gap (without credit) and real credit growth. This explains the relatively muted impact of the financial variable on the level and dynamics of the output gap. Data revisions appear not to be the primary source of revisions on output gaps estimates.

    JEL Codes: C11, C32, E24, E32.

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

No 43
2017-04-03

Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare

  • Abstract

    We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: “incremental” innovations by incumbents and “radical” innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.

    JEL Codes: E22, G12, H20, I30, O30.

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

No 42
2017-03-30

Monetary policy under behavioral expectations: Theory and experiment

  • Abstract

    Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.

    JEL Codes: C90, E03, E52, D84.

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

No 14
2017-03-24

Understanding monetary policy stance

  • Abstract

    The paper discusses monetary policy stance assessment in times of both conventional and unconventional monetary policy. Prior to the financial crisis, many central banks had one primary target and one instrument, the short-term rate. Over the years there was a consensus that the rule-of-thumb characterization known as the Taylor rule could broadly outline the policy and supplement discretionary policy. In the post-crisis period, one instrument was no longer sufficient and unconventional measures, such as large-scale asset purchases and forward guidance, were put in the policy makers’ agendas. Therefore, assessing the impact of the implemented unconventional measures and understanding the overall monetary policy stance in traditional ways no longer suffices, while finding new suitable ways is not an easy task. The shadow rate literature is able to circumvent the lower bound constraint and incorporate the monetary policy accommodation provided by the asset purchase programmes. However, application of the shadow rate estimates, in order to assess monetary policy stance, has to be done with caution since the estimates lack robustness.

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

No 41
2017-03-02

U.K. monetary policy under inflation targeting

  • Abstract

    This paper considers a variety of reaction functions in the context of real time data to analyse U.K. monetary policy under inflation targeting adopted in 1992. In order to deal with lack of current and future data in real time, we construct the forecasts of expected variables in the first step and use the constructed data for the estimations of contemporaneous- and forward-looking rules. Moreover, we employ the impulse-indicator saturation method to deal with the issue of outliers and therefore obtain robust estimates of policy parameters. Our results show that the robust characteristics of monetary policy during the inflation targeting regime are forward-looking and raising the interest rate by more than one-to-one to movements in inflation, thereby satisfying the Taylor principle.

    JEL Codes: C22, C52, C53, E52, E58.

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

No 40
2017-02-28

A panel VAR analysis of macro-financial imbalances in the EU

  • Abstract

    Also published in the ECB Working Paper Series


    We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

    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.

No 13
2017-02-24

Unconventional monetary policy: Interest rates and low inflation. A review of literature and methods

  • Abstract

    In this paper we provide an overview of the different approaches identified to capture monetary policy in a period of Zero Lower Bound (ZLB). We focus here on the methods closely linked to interest rates, which include: spreads, synthetic indices from principal component analysis and different shadow rates.
    In the second section of this review we calculate these measures for the euro area and also draw comparisons among different approaches and look at the effects on main macroeconomic variables, with a special focus on inflation. The impact of unconventional monetary policy shocks on inflation is found to be significantly positive by the majority of the studies and by using different methods.
    Ultimately, we provide a summary of the literature on the Natural Real Rate of Interest, which may be useful for assessing how long low (real) interest rates in a ZLB may stay in place; also suggesting some possible improvement in the estimations which would lead to more accurate policy recommendations.

    JEL Codes: E43, E52, E58, F42.

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

No 39
2017-02-02

Spatial nexus in crime and unemployement in times of crisis

  • Abstract

    Space is important. In this paper we use the global financial crisis as an exogenous shock to the German labor market to elucidate the spatial nexus between crime and unemployment. Our contribution is twofold: first, we lay down a parsimonious spatial labor market model with search frictions, criminal opportunities, and, unlike earlier analyses, productivity shocks which link criminal engagement with employment status. Second, we seek empirical support using data on the 402 German regions and years 2009 - 2010, in a setting that not only allows for crime spatial multipliers but also circumvents reverse causality by exploiting exogenous changes in unemployment due to the crisis. As predicted by our theory, the destruction of the lowest productivity matches, measured by increases in unemployment rates, has a significant impact on pure property crime (housing burglary and theft of/from motor vehicles) and street crime. The analysis offers important implications for local government policy.

    JEL Codes: C31, J64, K42, R10.

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

No 38
2017-01-27

Exchange rate pass-through in the Euro Area

  • Abstract

    Also published in the ECB Working Paper Series


    In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.

    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.

No 37
2016-12-01

Evolution of bilateral capital flows to developing countries at intensive and extensive margins

  • Abstract

    Online appendix (727.1 KB download icon)


    Motivated by the rise in capital flows to low-income countries (LICs), we examine the nature of these flows and the factors affecting foreign investors’ decision. Recognizing the presence of fixed investment costs, we analyze capital flows at both intensive and extensive margins. To fix ideas, we resort to the gravity literature for the estimating relationships which we embed into a two-tier econometric framework with cross-sectional dependence. Our main finding is that market entry costs are statistically and economically very detrimental to LICs. We also obtain the gravity-type relationship for the destination income unconditionally but not after conditioning on relevant variables, as well as establish labor productivity as a robust attractor of capital inflows.

    JEL Codes: C33, C34, F21, F62, O16.

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

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