Bank of Lithuania
Category
Series
Topic
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Year
All results 219
No 15
2014-10-21

Optimal asymmetric taxation in a two-sector model with population ageing

  • Abstract

    This paper presents a simple condition for optimal asymmetric labour (capital) taxation/subsidization in a two-sector model with logarithmic utilities and Cobb-Douglas production functions, linked to demographic factors: fertility rate and longevity. The paper shows that depending on parameter values, it may be optimal to tax or subsidize labour in the sectors. If it is optimal to tax the investment-goods sector, a Pareto-improving tax reform is possible. Larger output elasticities of capital in the sectors reduce the possibilities of a Pareto-improving reform, while population ageing in terms of higher longevity enhances the possibilities of welfare improvement for all generations. Fertility rates do not affect optimal taxation.

    JEL Codes: E62, H21, J10.

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

No 14
2012-12-13

New Keynesian Phillips curve in Lithuania

  • Abstract

    The paper provides estimates for the New Keynesian Phillips curve (NKPC) in Lithuania. The paper considers the baseline and hybrid NKPC, the latter accounting for inflation inertia, under the closed and open economy frameworks. The estimates highlight the importance of expected and lagged inflation in the inflation formation process. The role of real marginal cost is found to be limited in shaping the dynamics of inflation. The study yields estimates for the underlying characteristics of pricing behaviour in Lithuania. The estimates show that the price duration stands at around 2.2–2.8 quarters, while the fraction of firms that adjust prices in a backward looking way amounts to around one third.

    JEL Codes: D40, E30.

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

No 13
2012-06-18

Generating short-term forecasts of the Lithuanian GDP using factor models

  • Abstract

    This paper focuses on short-term Lithuanian GDP forecasting using a large monthly dataset. The forecasting accuracy of various factor model specifications is assessed using the out-of-sample forecasting exercise. It is argued that factor extraction by using a simple principal components method might lead to a loss of important information related GDP forecasting, therefore, other methods should be also considered. Performance of several factor models, which relate the factor extraction step to GDP forecasting, was tested. The effect of using weighted principal components model, with weights depending on variables’ absolute correlation with GDP, was explored in greater detail. Although factor models performed better than naive benchmark forecast for GDP nowcasting and 1 quarter ahead forecasting, we were unable to set up the ranking among different factor model specifications. We also find that a small scale factor model with 5 variables (which could be regarded as the most important monthly variables for GDP nowcasting) is able to nowcast GDP better than models with a full data set of 52 variables, which might indicate that for the case of the Lithuanian economy, a smaller scale factor models may be more suitable.

    JEL Codes: C22, E37.

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

No 12
2011-12-21

Profit dynamics across the largest Euro Area countries and sectors

  • Abstract

    This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors.

    JEL Codes: C32, E23, E25.

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

No 11
2011-12-14

Price setting in Lithuania: More evidence from the survey of firms

  • Abstract

    The paper examines price setting in Lithuania based on ad hoc survey of the Bank of Lithuania “On Price and Wage Setting”. The study extends the survey data analysis presented in Virbickas (2009). The paper points to the incidence of both the time-dependent and the state-dependent price reviewing policies used by the investigated firms, though the price reviewing practices appear to be somewhat tilted to the state-dependent pricing. Analysis provides evidence on the reasons for upward and downward stickiness of prices. Delayed price adjustment is found to be mostly related to the price adjustment stage rather than the price reviewing stage. The most momentous explanations for not adjusting prices upwards or downwards rest on the cost-based pricing and the explicit contracts. The study finds an asymmetric influence of some of the price factors. In particular, the cost factors are found to be decisive in invoking the price increase rather than the price decrease.

    JEL Codes: D40, E30.

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

No 10
2011-07-04

What caused the recent Boom-And-Bust cycle in Lithuania? Evidence from a macromodel with the financial sector

  • Abstract

    In this paper we analyse determinants of the recent boom-and-bust cycle of the Lithuanian economy with the help of a medium-sized macroeconometric model that incorporates a functional financial block. Special emphasis is put on the role of credit market conditions during the overheating episode. We quantitatively estimate the impact of credit conditions and externally funded bank lending on macroeconomic developments. There is evidence that easy credit conditions and active credit expansion contributed moderately to real economic growth but significantly added to overheating pressures by pushing up real estate prices, encouraging concentration of labour and capital into procyclical sectors and increasing private sector’s debt burden. During the boom episode buoyant external environment provided strong background for export-led growth, which was later strongly affected by temporary foreign trade collapse at the outset of the economic crisis. Model results also suggest that government’s discretionary fiscal policies may have contributed to economic overheating and severity of the ensuing crisis by not adopting sufficiently prudent fiscal stance during the boom episode. The model confirms that more favourable interest rate environment and accommodating fiscal policies are important for providing a temporary relief for the crisis-stricken economy but deep structural transformation of the economy is needed for the sustainable recovery to take hold.

    JEL Codes: E10, E17, E37, E51.

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

No 9
2011-06-06

Potential output in DSGE models

  • Abstract

    In view of the increasing use of Dynamic Stochastic General Equilibrium (DSGE) models in the macroeconomic projections and the policy process, this paper examines, both conceptually and empirically, alternative notions of potential output within DSGE models. Furthermore, it provides historical estimates of potential output/output gaps on the basis of selected DSGE models developed by the European System of Central Banks’ staff. These estimates are compared to the corresponding estimates obtained applying more traditional methods. Finally, the paper assesses the usefulness of the DSGE model-based output gaps for gauging inflationary pressures.

    JEL Codes: E32, E37, E52.

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

No 8
2010-02-23

The implementation of scenarios using DSGE models

  • Abstract

    The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the designing of a broad range of scenarios and tackling a large range of issues, offering at the same time an appealing structural interpretation of the scenario specification and simulation results. The paper provides illustrations on some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, treatment of monetary and fiscal policy rules.

    JEL Codes: E32, E52, E62, E37.

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

No 7
2010-01-23

Wage and price setting behaviour of Lithuanian firms

  • Abstract

    This paper investigates the wage and price setting behaviour of Lithuanian firms on the basis of an ad hoc survey “On Price and Wage Setting” undertaken by the Bank of Lithuania. The paper provides survey evidence on the frequency of wage and price changes. The frequency of wage changes turns out to be higher in firms that apply collective pay agreements, while the frequency of price changes appears to be positively affected by the market competition. Labour cost share is not found to be significant in making the impact on the frequency of price changes. This paper also investigates the role of certain technological, institutional and other factors in shaping firms’ responses to a negative demand shock, an intermediate input cost shock and a wage shock. A higher labour cost share is found to increase the likelihood of a price increase following a wage shock. Flexible wage components mitigate firms’ responses to a slowdown in demand and an intermediate input cost increase. The behaviour of firms following the investigated shocks is also affected by the level of competition. The role of collective pay agreements appears to be rather limited in shaping responses of firms to the shocks.

    JEL Codes: D40, J30.

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

No 6
2009-04-23

Building an artificial stock market populated by reinforcement-learning agents

  • Abstract

    In this paper we propose an artificial stock market model based on interaction of heterogeneous agents whose forward-looking behaviour is driven by the reinforcement learning algorithm combined with some evolutionary selection mechanism. We use the model for the analysis of market self-regulation abilities, market efficiency and determinants of emergent properties of the financial market. Distinctive and novel features of the model include strong emphasis on the economic content of individual decision making, application of the Q-learning algorithm for driving individual behaviour, and rich market setup.

    JEL Codes: G10, G11, G14.

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

No 5
2009-03-23

Estimation of the Euro Area output gap using the NAWM

  • Abstract

    This paper presents preliminary estimates of the euro area flexible-price output gap using the estimated version of the New Area-Wide Model (NAWM) – a large-scale DSGE model of the euro area developed and maintained by ECB staff. Following a definition of the flexible-price output gap frequently used in the literature, we show that the NAWM-based measure may at times differ quite considerably from more traditional output gap measures and may display fluctuations of larger amplitude. The dynamics of flexible-price output is mainly driven by shocks to technology, whereas fluctuations in the output gap can be attributed equally to supply and demand shocks. We analyse how robust this output gap estimate is with respect to new incoming data and compare it’s inflation forecast performance with alternative measures.

    JEL Codes: C11, C32, E31, E32.

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

No 4
2009-02-23

The effects of fiscal instruments on the economy of Lithuania

  • Abstract

    The goal of this paper is to examine the dynamic effects of fiscal instruments in Lithuania on the economy and welfare. In the analysis, a calibrated dynamic stochastic general equilibrium model for Lithuania is employed. The calculation implies that 9-16 percent of tax cuts are self-financing in the long run. It suggests that the slope of Laffer curve in Lithuanian economy is rather flat. The analysis of effects of different tax cuts shows that the impact of 1 percentage point permanent decrease in statutory tax rate on gross domestic product is very small (within the range of –0.15 through 0.15 percent in all cases). The estimated government expenditure multiplier has a different sign in the long run when various financing sources are used to balance the government budget.

    JEL Codes: E62, H24, H25.

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