Publications

While Euro area interest rates were responding to accommodative monetary policy and decreasing throughout 2015-19, in stark contrast, Lithuania’s bank lending rates increased. Although the rates have slightly dropped around the onset of the pandemic, they are still elevated and well above the EA figures. This paper calls into question, what were the drivers of such interest rate dynamics in Lithuania? By analysing the historical events and practical aspects of loan pricing in Lithuania’s banking industry, we build an empirical model that exploits lending rate variation across banks, time and lending segments, and maps it to different drivers of pricing. We find that the recent changes in lending rates can be attributed to average bank margins, which moved largely in response to changes in market concentration.

Keywords: interest rates, loan pricing, banking, concentration, capital requirements.

JEL Codes: D22, D40, E43, G21, L11.

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

With a view to promoting a stable and competitive development of the Lithuanian capital market, attracting new investors and increasing the activity of existing investors, promoting and facilitating  the use of existing financial market instruments by the country's economic entities and their access to the financing instruments used in other countries, the Bank of Lithuania has drawn up a plan of measures for the development of the capital market that took into account  not only the proposals and problems identified by market players and investors, but also those identified by the Bank of Lithuania, and  its proposals as to how such issues could be addressed.

During the Covid-19 pandemic, house prices and mortgage credit are growing at a long-unseen pace. However, it is unclear, whether such growth is warranted by the underlying market and macroeconomic fundamentals. This paper offers a new structural two-market disequilibrium model that can be estimated using full-information methods, and applied to analyse housing and credit dynamics. Dealing with econometric specification uncertainty, we estimate a large ensemble of the two-market disequilibrium model specifications for Lithuanian monthly data. Using the model estimates, we identify the historical drivers of Lithuania’s housing and credit demand and supply, as well as price and market quantity variables. The paper provides a novel approach in the financial stability literature to jointly measure house price overvaluation and mortgage credit flow gaps. We find that by mid-2021 Lithuania was experiencing a heating in housing and mortgage credit markets, with home prices overvalued by around 16% and the volume of mortgage credit flow being 20% above its fundamentals.

JEL Codes: C34, D50, E44, E51, G21.

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

Communication issues in central banking are important for maintaining the transparency of decisions and preparing financial markets for future changes in monetary policy. This study aims to determine what impact ECB monetary policy communication has on sovereign yields in the euro area on an intraday basis. We analyze different types of ECB monetary policy communication events: ECB monetary policy decisions, press conferences, accounts, and speeches made by Executive Board members. With the help of OLS and panel regression, we study how these communication events and control variables affect the intraday yield changes of major euro area sovereign and overnight index swap markets since 2014. The results from the baseline regression reveal that all four types of analyzed ECB monetary policy communication events have been affecting yields of the largest euro area sovereigns, with ECB decisions and press conferences showing the most substantial impact. Countries with the highest debt levels (such as Italy, Spain, and France) experienced the most robust changes in fiscal costs from ECB communication events, while the German bund market seems less affected. However, the period encompassing the economic shock induced by the Covid-19 pandemic shows much weaker effects, while Executive Board members who have been in charge since the start of the sample period of 2014 seem to have a much more substantial impact on euro area yields than more recent members. Sovereign yields bear the most decisive impact from media articles covering speeches’ topics of unconventional monetary policy measures and, to a smaller extent, interest rates and monetary policy targets.

JEL Codes: C80, E43, E44, E58, G12.

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

I provide the first statistics on producer and consumer price rigidity in Lithuania based on HICP and PPI item-level databases covering about 73% and 99.5% of their respective weights between 2010 and 2018. Producer prices are much more flexible than consumer prices, with an average monthly frequency of price change of 58% versus 18%. Contrariwise, the average size of price increases and decreases is higher in the HICP, reaching about 17-18% in absolute terms, whereas it is 7.5% in the PPI. In both price families, changes in item-level inflation are primarily due to variations in the size of price changes. However, the sources of these size changes are substantially shaped by shifts in the share of the number of price increases in the total.

JEL Codes: D40, E31, E50.

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

This paper evaluates the worker-level effects of a historically large and permanent increase in the minimum wage in Lithuania. Our identification strategy leverages variation in workers’ exposure to the new minimum wage, and exploits the fact that there has been no increase in the minimum wage in previous years, to account for heterogeneous labor market prospects of low-wage workers relative to high-wage workers. Using detailed administrative records to track workers before and after the policy change, we show that the minimum wage hike significantly increased the earnings of low-wage workers. This direct effect was amplified by wage spillovers reaching the median of the income distribution. Overall, we find no negative effects on the employment prospects of low-wage workers. However, we provide suggestive evidence that young workers, highly exposed municipalities, and tradable sectors may be more negatively affected. Taken together, our findings imply an employment elasticity with respect to the minimum wage of -0.021, and an own-wage elasticity of -0.033, suggesting that wage gains dominated employment losses.

Keywords: Minimum Wage, Employment, Wages.

JEL codes: J23, J38, J48.

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

In this paper we study how labor market duality affects human capital accumulation and wage trajectories of young workers. Using rich administrative data for Spain, we follow workers since their entry into the labor market to measure experience accumulated under different contractual arrangements and we estimate their wage returns. We document lower returns to experience accumulated in fixed-term contracts compared to permanent contracts and show that this difference is not due to unobserved firm heterogeneity or match quality. Instead, we provide evidence that the gap in returns is due to lower human capital accumulation while working under fixed-term contracts. This difference widens with worker ability, in line with skill-learning complementarity. Our results suggest that the widespread use of fixed-term work arrangements reduces skill acquisition of high-skilled workers, holding back life-cycle wage growth by up to 16 percentage points after 15 years since labor market entry.

Keywords: labor market duality, human capital, earnings dynamics.

JEL codes: J30, J41, J63.

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

ABSTRACT

This paper provides empirical evidence on how the aftermath of the 2008 crisis affected firm productivity in the UK, taking account of the cohort effect of firms established after 2008. We test this using firm-specific and time-varying credit scores to capture firms’ ability to access credit. To overcome the identification problem, a matched sample based on firm’s credit score, firm age, size and ownership status is used by undertaking the propensity score matching approach. While we find evidence that smaller firm size and changes in credit conditions affect productivity, about half of the difference in productivity remains unexplained. We extend the matching analysis to examine sectors and cohorts, and find that, during 2011-2016, the low productivity is driven primarily by newer firms operating in the services sector, rather than in manufacturing. Within services, the underlying productivity puzzle is driven by a cessation of growth in high-productivity financial services, while abundant labour supply has led to a ‘levelling down’ of performance of newer firms in the rest of services, in line with relatively low productivity manufacturing.

Keywords: Total Factor Productivity, Cohort, Crisis, Firm Survival, Credit Score.
JEL Classification: E00, D24, E30, G21

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

This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.

Keywords: New Keynesian model, Search and matching, ZLB, Forward guidance.

JEL codes: E30, J60.

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

The analysis presents the results of a desk review carried out by the Bank of Lithuania, the aim of which was to assess whether the application of stricter anti-money laundering and counter-terrorism financing (AML/CTF) measures and de-risking policy by the payment service providers supervised by the Bank of Lithuania reduce the accessibility of payment services for various legitimate groups of users. 

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

Variable markups and multinational production have gathered considerable attention in the trade literature because of their empirical prevalence and welfare implications. This paper studies the welfare implication of tariffs and optimal tariffs in an environment that features firm heterogeneity, variable markups, and FDI. I find: (i) Tariffs endogenously affect firm entry level, producing different comparative statics in the short run versus long-run. (ii) Variable markups generate multiple externalities in this economy, causing market outcome to differ from the socially optimum outcome systematically. Permitting tariff-jumping FDI can lower the domestic cutoff levels and reduce the misallocation in the economy. (iii) Free trade is not always socially optimal. If the domestic marginal cost cutoff is sufficiently high, a positive tariff can be welfare-improving since it encourages firm entry. The Nash equilibrium tariff level will also be higher than the socially optimal tariff. (iv) The interaction of variable markup and FDI generates novel welfare implications that are absent if consumers possess CES preference.

Keywords: Optimal tariff, Firm heterogeneity, Misallocation, Variable markups, FDI.

JEL codes: F12, F13, F23, F60, R13.

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

Is there any specific structure of the financial system which promotes economic growth or does this structure depend on the level of economic growth itself? Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. We account for unobserved heterogeneity and operate within alternative econometric approaches. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. Financial development does matter for growth, however, the size and significance of the effect vary. Financial reforms affect economic growth more than financial development. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.

Keywords: Financial Development, Financial Reforms, Economic Growth, Quantile Regression, Panel Data.

JEL codes: O16; O40; G10; G20; C21; C23.

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