Bank of Lithuania
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All results 219
No 29
2016-07-26

International endogenous growth, macro anomalies, and asset prices

  • Abstract

    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.

No 28
2016-07-01

Labour shares, fertility and longevity in an OLG model

  • Abstract

    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.

No 27
2016-05-09

Disentangling the monetary policy stance

  • Abstract

    Non-technical summary (6.1 KB download icon)


    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.

No 26
2016-05-05

Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in the EU

  • Abstract

    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.

No 25
2016-04-12

Commodities, financialization, and heterogeneous agents

  • Abstract

    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.

No 24
2016-04-04

Monetary policy transmission: the case of Lithuania

  • Abstract

    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.

No 23
2016-01-23

Population ageing and inflation with endogenous money creation

  • Abstract

    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.

No 10
2016-01-23

Labor market dynamics, endogenous growth, and asset prices

  • Abstract

    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.

No 22
2015-12-02

Determinants of credit constrained firms: Evidence from Central and Eastern Europe Region

  • Abstract

    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.

No 9
2015-11-17

Financial cycle measures for 41 countries: A new database

  • Abstract

    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.

No 21
2015-11-13

Global perspective on structural labour market reforms in Europe

  • Abstract

    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.

No 8
2015-10-12

Wage and price setting behaviour of Lithuanian firms: Survey–based evidence for 2008–2009 and 2010–2013

  • Abstract

    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.