Bank of Lithuania
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All results 224
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.

No 20
2015-09-24

Current account and REER misalignments in Central Eastern EU countries: an update using the macroeconomic balance approach

  • Abstract

    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.

No 7
2015-09-24

International trade with pensions and demographic shocks

  • Abstract

    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.

No 6
2015-07-02

A note on the bootstrap method for testing the existence of finite moments

  • Abstract

    This paper discusses a bootstrap-based test, which checks if finite moments exist, and indicates cases of possible misapplication. The analysis indicates that a procedure for finding the smallest power to which observations need to be raised, such as the test rejects a hypothesis that the corresponding moment is finite, works poorly as an estimator of the tail index or moment estimator. This is the case especially for very low- and high-order moments. Several examples of correct usage of the test are also shown. The main result is derived analytically, and a Monte-Carlo experiment is presented.

    MSC2010 Codes: 62G10, 65C05.

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

No 19
2015-06-23

Is there a competition-stability trade-off in European banking?

  • Abstract

    The trade-off between bank competition and financial stability has always been a widely and controversial issue, both among policymakers and academics. This paper empirically re-investigates the relationship between competition and bank risk across a sample of 54 European listed banks over the period 2004-2013. However, in contrast to most extant literature, we consider both individual and systemic dimension of risk. Bank-individual risk is measured by the Z-score and the distance-to-default, while we consider the SRISK as a proxy for bank systemic risk. Using the Lerner index as an inverse measure of competition and after controlling for a variety of bank-specific and macroeconomic factors, our results suggest that competition encourages bank risk-taking and then increases individual bank fragility. This result is in line with the traditional “competition-fragility” view. Our most important findings concern the relationship between competition and systemic risk. Indeed, contrary to our previous results, we find that competition enhances financial stability by decreasing systemic risk. This result can be explained by the fact that weak competition tends to increase the correlation in the risk-taking behavior of banks.

    JEL Codes: G21, G28, G32, L51.

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

No 5
2015-05-02

Business models of Scandinavian banks subsidiaries in the Baltics: identification and analysis

  • Abstract

    Since the crisis in the Baltic countries in 2009, the question on the particularities of business models adopted by foreign-owned banks has been often raised. The business models of these banks have changed significantly, but they still remain of major concern. The aim of this paper is to identify what type of business models have been chosen by the Baltic foreign-owned banks, to assess them as well as to provide recommendations on how to address the outlined challenges.
    The Literature Review showed that the Business Model Canvas approach can be used for bank business model analysis. However, banking specialness should be taken into account. Empirical research was carried out using a combination of qualitative and quantitative methods for nine Scandinavian banks subsidiaries operating in the Baltics. The main focus of this research was the complex analysis of bank business model components, using the newly created system of key business model indicators. Business model analysis was based only on publicly available information, which is limited and not standardised.
    The main characteristics of the business model of Scandinavian banks subsidiaries established in the Baltics are as follows: retail banks operating in one jurisdiction, dependency on the parent bank decisions, aversion to risk, stronger focus on non-interest income and high efficiency due to cost cutting and e-banking, orientation on safety (banks meet prudential requirements with large reserves), and medium profitability with a negative trend for the future. It was determined that if banks keep on doing their business as they are currently, their possibilities of generating acceptable returns will be of major concern. The biggest opportunity for banks in a low interest rate environment is to focus on increasing the volume of interest bearing assets. Financing small and medium-sized enterprises (SMEs), especially in productive sectors and innovative companies, could be the best outcome for banks and Lithuania’s economy. To achieve this goal, banks need to set SMEs financing as a strategic priority, make fundamental changes in their lending policy. The EU and local governments should give financial support for SMEs to strengthen this sector, and that should encourage banks to finance SMEs more actively as well.
    The analysis of bank business models is a relatively new approach towards banking industry analysis. This paper is the first attempt of deeper analysis of business models of Scandinavian banks subsidiaries operating in the Baltics. This paper can serve as an eye-opener for Financial Supervisory Authorities and Central Banks, Scandinavian banks when drafting strategies for their subsidiaries and Government representatives who are responsible for the banking system strategy and strengthening SMEs sector.

    JEL Codes: G21, M21.

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

No 4
2015-04-23

Leading indicators for the countercyclical capital buffer in Lithuania

  • Abstract

    This paper presents the analysis of indicators that could signal the build-up of systemic risk in Lithuania during the periods of credit expansion. The resulting set of early warning indicators could be useful in operationalizing countercyclical macroprudential policy measures, especially the countercyclical capital buffer (CCB). It could serve as a starting point in considerations whether there is a need to increase banks’ resilience in the upturn of financial cycle by accumulating additional capital buffers.
    Taking into account the short Lithuanian data series which cover only one systemic banking crisis period, the analysis is extensively based on international research, particularly on findings of the European Systemic Risk Board (ESRB) Expert Group which provided analysis for the ESRB Recommendation on guidance on setting countercyclical buffer rates (ESRB 2014/1). Consistent with the existing research, we show that the deviation of the ratio of credit to gross domestic product (GDP) from its long-term trend (credit-to-GDP gap) is a suitable early warning indicator of financial crises in Lithuania. However, gap estimation faces uncertainty as the long-term trend is unobservable. To deal with the uncertainty, the estimation of the long-term trend was augmented with forecasts and most suitable alternative to the so called standardised ‚Basel gap‘ (suggested by the BCBS) is provided. In addition to this, complementary early warning indicators have been selected that could give concise yet comprehensive and robust view of the state of the Lithuanian economy. The performance of selected early warning indicators has also been evaluated for the three Baltic states (Lithuania, Latvia and Estonia).

    JEL Codes: C40, G01.

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

No 18
2015-04-14

Long-run determinants and misalignments of the real effective exchange rate in the EU

  • Abstract

    Exchange rate assessment is becoming increasingly relevant for economic surveillance in the European Union (EU). The persistence of different wage, price and productivity dynamics among the Economic and Monetary Union (EMU) countries or EU members with a fixed exchange regime with the euro, coupled with the impossibility of correcting competitiveness differentials via the adjustment of nominal rates, have resulted in divergent dynamics in Real Effective Exchange Rates. This paper explores the role of economic fundamentals, included in the transfer effect theory, in explaining medium/long-run movements in the Real Effective Exchange Rates in the EU over the period 1994–2012 by using heterogeneous, co-integrated panel frameworks in static and dynamic terms. In addition, the paper provides an analysis of the misalignments of the rate for each member state based on the “equilibrium” measure calculated from the permanent component of the fundamentals (the so-called Behavioural Effective Exchange Rate).
    We find that the coefficients of the determinants are extremely different across groups in magnitude and sometimes in sign as well and the transfer theory does not hold for periphery and the Central and Eastern European countries (CEECs). The relative importance of the transfer variable and the Balassa-Samuelson measure are crucial for the asymmetries. The resulting misalignments in EU28 are huge and the patterns diverge significantly across groups. The core countries have been undervalued for almost the whole period, which entails from an important increase in competitiveness for those countries. Instead the periphery has experienced high rates, especially in Portugal. In addition, the behaviour of CEECs is also driven, as expected, by the catching-up process and the criteria to the accession to the EU. The misalignments in this case are still extremely wide and reflect these phenomena.

    JEL Codes: F31, C23.

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