Publications

This paper analyzes a model of multiple overconfident traders submitting market orders where traders’ private information is subject to correlated errors, as well as its extension to endogenous information. We consider two standard types of overconfidence: overconfidence in own signals and underconfidence in others’ signals. The analyses on the effects of overconfidence on traders’ behavior and the equilibrium price suggest that these effects are richer than our typical understanding of overconfidence focusing on its positive effect on trading volume as follows: First, trading volume may increase or decrease with overconfidence depending on its type. Second, these different types of overconfidence may differ radically on the patterns of trading volume and price informativeness with respect to the number of traders. Third, overconfidence can cause equilibrium multiplicity in information acquisition.

JEL Classification: G11, G14, G4
Keywords: Overconfidence; Disagreement; Strategic trading; Information aggregation; Efficient market hypothesis

The carbon intensity of U.S. output has experienced a secular decline in recent decades. Using an agnostic identification approach we show that news about future total factor productivity explain the bulk of longrun variation in emission intensity. News about green technologies give rise to similar dynamics. Both innovations precede a persistent increase of output and TFP. Yet, they are associated with only a temporary decline of emissions, followed by a hump-shaped rebound. New technologies have thus been a key driver of growth in recent decades but have not permanently reduced emissions. We discuss the Economic underpinnings of this rebound effect.

Keywords: carbon emissions, carbon intensity, news shocks, structural vector autoregressions.

JEL Classification: C32, O47, Q43, Q55.

We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly ascertain whether fiscal stance matters for the conduct of monetary policy. We use the GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 using the thick-modelling approach. The results reveal that the actions of the ECB have exhibited desirable effects on stabilising monetary policy, and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit is usually not statistically significant in explaining the ECB’s stance on monetary policy. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary policy stance. These findings speak against the fiscal dominance regime in the euro area, where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the precise specification of the GMM and SVAR models or whether the sample period is shortened to only 2012–2022.

Keywords: ECB, monetary policy, reaction function, Taylor rule, fiscal deficits, fiscal stance.

JEL Classification: E43; E52; E58; E61; E62; H62.

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

In this paper we examine multiple dimensions of ECB monetary policy communication by identifying its sentiment and relation with the economic environment and financial markets. We quantify communication sentiment using transcripts from official ECB communication events – press conferences, accounts and Executive Board speeches – as well as media reactions that highlight the key messages of those events. Importantly, we create unique lexicons for both of those communication types. We find that the overall trends in the sentiment indices for the analysed communication events closely resemble the movements of monetary policy stance as well as macroeconomic indicators in the euro area, both before and after the COVID-19 shock period. The communication tone generally shifts in advance of actual monetary policy actions. Using regression analysis, we find some expected, statistically significant effects of press confer-ence sentiment on bank stock prices (information-type shock) and identify the impact of Executive Board speeches on euro area fiscal borrowing costs (short-term OIS rates). Fragmentation issues among euro area member states do not seem to be negatively affected by the sentiments of the ECB’s communication. Still, policy makers should be aware that the tone of their communication events is likely to affect particular financial markets.

Keywords: ECB, monetary policy, communication, sentiment analysis, euro area, financial markets.

JEL Codes: C80, E43, E44, E58, G14.

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

The need for transparent sustainability financial information has been growing rapidly in recent years. Financial information is no longer sufficient for investors and the public, they are looking at how sustainability-related risks are linked to the business strategy of the financial market participant and integrated into the management of other risks, as well as how sustainability aspects are addressed by the financial market participant. In the context of growing interest of the public and stakeholders in sustainable finance, financial market participants are expected to disclose sustainability information not only in accordance with the binding sustainability disclosure requirements in force, but also to do so voluntarily, clearly and in full detail.

Given the relevance of the topic, the Bank of Lithuania carried out an analysis of sustainability disclosure practices of insurance undertakings and credit institutions, the aim of which is to review the sustainability information disclosed by institutions, its content and scope, and to identify good practices and provide recommendations to market participants.

This overview presents sustainability disclosure practices of insurance undertakings and credit institutions established in Lithuania. The analysis was based on information and data available on websites from 1 July 2022 to 1 November 2022. The overview consists of three parts: the first is aimed at reviewing compliance with the disclosure requirements set out in Articles 3 to 5 of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector, the second focuses on compliance with the obligation to prepare social responsibility reports laid down in the Republic of Lithuania Law on Financial Reporting by Undertakings, and the third on the state of play of voluntary disclosure of sustainability information. In each part, we present good practice tables that we believe can be useful for improving sustainability disclosure practices.

The following credit institutions established in Lithuania participated in the analysis:

European Merchant Bank UAB, AB Fjord bank, UAB GF bankas, the United Central Credit Union, the Lithuanian Central Credit Union, AB Mano bankas, UAB Medicinos bankas, PayRay Bank, UAB, Revolut Bank UAB, AB SEB bankas, UAB SME Bank, Swedbank, AB, AB Šiaulių bankas (hereinafter – credit institutions),

as well as the following insurance undertakings established in Lithuania:

Allianz Lietuva gyvybės draudimas UAB, Compensa Vienna Insurance Group, ADB, ERGO Life Insurance SE, ADB Gjensidige, UAB draudimo kompanija LAMANTINAS, AB Lietuvos draudimas, UAB PZU Lietuva gyvybės draudimas, Gyvybės draudimo UAB SB draudimas, INVL Life, UADB, (hereinafter – insurance undertakings) (credit institutions and insurance undertakings jointly – financial institutions, financial market participants).

Available only in Lithuanian

We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. In 2014, Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

Keywords: economic sanctions, firm adjustment margins, part-time employment, new export markets.

JEL Classification: D22, D25, F14, F16, F51

The high-paced growth of the Lithuanian mortgage market may cast doubt on either the efficacy of the country’s macroprudential toolkit, or the appropriateness of its current parametrisation in putting a backstop to excessive dynamics. This paper assesses the adequacy of BBM’s in Lithuania by building a novel lifetime expected credit loss framework that is founded on actual loan-level default and household income data. Based on the modelling framework we document seven findings which are relevant for policymakers. We show that the BBM package effectively contains mortgage credit risk and that housing loans are more resilient to stress than in the pre-regulatory era. Our BBM limit calibration exercise reveals that: i) in the low-interest rate environment income-based measures could have been tighter; ii) borrowers taking out secondary mortgages rightly are and should be required to pledge a higher down payment of at least 30%.

Keywords: macroprudential policy, borrower-based measures, LTV, mortgage credit risk, lifetime expected credit loss, probability of default.

JEL Codes: C25, E61, G18, G21, G51.

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

The Bank of Lithuania, in the course of its risk-based supervision, observes that FMPs face issues related to the practical implementation of monitoring. This document provides a brief overview of the purpose of the organisation and implementation of monitoring, the identification and interoperability of the monitoring model/framework and solutions, the adaptation of individual monitoring solutions, including monitoring scenarios, to the FMP’s business model and the existing customer portfolio, as well as the periodic review and testing of the monitoring solutions, including automated scenarios. This review also aims to provide a brief overview of possible monitoring solutions in cases of increased ML/TF risks, best practices in the review of alerts generated by the automated monitoring system and in the process of conducting more in-depth internal investigations, as well as practical examples of internal investigations that have been carried out inappropriately.

The overview is based on the provisions of the legislation of the Republic of Lithuania, best practices of international organisations and other supervisory authorities, as well as best practices of financial institutions observed by the Bank of Lithuania in the exercise of its supervisory functions.

Using detailed administrative data from Spain, we investigate the impact of having an initial work experience in an employee-owned firm (EOF) versus a conventional business on subsequent earnings. We find that young workers’ exposure to EOFs at the time of labour market entry reduces earnings by about 8% during the first 15 years in the labour market. The selection of individuals with low initial ability in EOFs does not appear to be a relevant channel. Our results seem to be rather related to differences in job mobility and wage returns to experience. On the one hand, we document lower wage returns to experience acquired in EOFs, although no differences in subsequent career progression in terms of promotions. On the other hand, we find that workers who had their first job in EOFs show a strong attachment to such a business model and are less likely to voluntarily leave their employers. Taken together, our findings suggest the existence of nonpecuniary job attributes offered by EOFs that might compensate for lower lifetime earnings.

Keywords: Employee-Owned Firms, Careers, Wages, Job Mobility

JEL Classification: J31, J50, J62

Recently, there has been a surge of interest in policies that target climate change. This paper begins by discussing why policymakers, and central banks in particular, should be concerned about climate change, and goes on to argue why carbon pricing is an appropriate political instrument to reduce greenhouse gas (GHG) emissions. The paper details two categories of carbon pricing, namely carbon taxation and the introduction of Emission Trading Systems (ETSs), illustrating why a carbon tax is the more efficient instrument. Popular models for optimal carbon taxation and implications of carbon taxation are discussed. The paper concludes with recommendations to policymakers, which include advocacy of differentiated rather than uniform carbon taxation, phased-in carbon taxation instead of a blanket approach, introduction of the carbon border adjustment mechanism (CBAM), and Green Quantitative Easing (QE).

Keywords: carbon taxation, climate change, green QE.

JEL Codes: Q54, Q58, H23, E51, E62

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

This paper studies the drivers of wage growth in Lithuania over the period 2008-2020. Using administrative data as well as aggregate measures reflecting the state of the economy, we estimate an extended version of a wage Phillips curve. Our reducedform estimates indicate that nominal wage growth was tightly linked to labor market fluctuation over this period. Labor productivity, changes in the minimum wage, and the composition of employment also contributed to wage dynamics. However, we find little evidence that past inflation has been a push factor. To understand the underlying economic primitives behind our findings, we estimate a structural Bayesian autoregressive model. Our structural analysis reveals a significant contribution from aggregate supply shocks, reflecting a stronger relationship between productivity and wages than implied by our reduced-form estimates. Moreover, the historical decomposition reveals that since 2013, wages grew over and above productivity due to rising aggregate demand and labor market disturbances.

I use data from the European Central Bank’s Household Finance and Consumption Survey (HFCS) to examine how house price expectations differ across Europe and to identify the main drivers of such expectations. During the period 2010-2017, housing-related assets drove the household balance sheet evolution. Therefore, house price expectations remained highly heterogenous across European countries. The paper found that changes in income and house prices are the key determinants of house price expectations. Homeownership status, income and wealth distributions also explain part of the heterogeneity in household expectations about house prices in Europe. All these effects appear to be stronger for renters and for households from the bottom quintiles in income and wealth distributions.

Keywords: house price expectations; housing; household portfolio.

JEL Classification: D10, D31, D84, G11