Publications

This paper investigates how the introduction of a central bank digital currency (CBDC) impacts the banking sector. The deposit market is modeled as a Salop circle and deposits are subject to liquidity shocks. Absent a CBDC the interbank market can redistribute liquidity between banks. However, the central bank does not take part in the interbank market and CBDC leads to greater reliance of the banking sector on central bank standing facilities. The model shows adjusting the remuneration rate of CBDC has little pass-through to the deposit rate set by banks and may have implications for transmission of monetary policy.

Keywords: central bank digital currency, banking, money, interbank Market.

JEL Classification: E42, E52, E58, G21.

We develop a model connecting financial shocks, capital investment decisions by firms, and change in measured aggregate productivity using a dynamic general equilibrium model. Data shows that post the 2008 crisis, firms changed their allocation between assets of varying depreciation rates as credit conditions tightened, which is connected to changes in measured TFP. We propose a model that shows the mechanism of an adverse shock to credit access causing firms to change the balance sheet portfolio composition of productive assets. This reallocation of assets leads to an increase in measured productivity.

Keywords: Financial crisis, measured productivity, collateral, capital assets, credit constraint.

JEL Classification: D5, E13, E22, E32, G01, G11, G23.

We show that advance information on future income can be identified from the correlation between consumption growth and future income growth conditional on current income growth. Employing PSID data, we find that this conditional correlation is positive and significant. We use this evidence to structurally estimate a standard incomplete markets model and discover that US households possess enough advance information to reduce their income forecast errors by 15%. This significantly affects the measurement of consumption insurance. With advance information, 25% more income shocks pass through to consumption on average, and more than twice as much for the 5% asset poorest.

Keywords: income risk, advance information, consumption insurance, panel data, incomplete markets.

JEL Classification: C23, D12, D31, D52, D81, E21, G52.

This paper studies the effect of school closure on student outcomes in the Lithuanian context. Using administrative student-level data over 2013–2017 and propensity score matching, we create a balanced sample of control and treatment groups. In contrast to other studies, we focus on students in the final years of high school, possibly eliciting the upper bar of the disruption effect. Also, we follow students after high school graduation, providing evidence on labor market outcomes. We find that the school closure effect depends on the main teaching language. If we match students on a large set of student and school characteristics but the main teaching language, school closings have a lasting negative effect on exam performance and enrolling in higher education. Matching students on the main teaching language significantly reduces the negative school closure effect, suggesting that the disruption effect is considerably smaller and also has limited outcomes after high school if we take the main teaching language into account.

Keywords: School closure, education finance, student outcomes.
JEL Classification: H52, I22, I24.

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

In carrying out, within its competence, risk-based supervision of FMPs, the Bank of Lithuania notes that FMPs do not always pay appropriate attention to the implementation of international sanctions and restrictive measures and that FMPs face difficulties in the implementation of international sanctions and restrictive measures in practice. In this Review of the Implementation of International Sanctions in Financial Institutions (hereinafter – the Review), the Bank of Lithuania provides key insights into the measures taken by FMPs to implement international sanctions and restrictive measures.

The Review is based on the provisions of legal acts and good practices of the EU and the Republic of Lithuania, Analysis of the International Sanctions Screening Systems conducted by the Bank of Lithuania over 20 FMPs (banks, electronic money institutions, payment institutions) in December 2021–May 2022 (hereinafter – the Analysis), contains examples of good practice identified during the Analysis and cases where the measures applied to implement international sanctions need to be improved.

Additional housing equity collateral can loosen borrowing constraints and increase spending for households that value their home highly. However, rising home values also raise the cost of living via higher imputed rental costs, offsetting their impact on consumption. Usage of Household Finance and Consumption Survey microdata and third-party evaluation of housing value enable identification of the causal effect of house price changes on consumer spending. This paper is one of the first that explores this relationship European-wide with an application of an instrumental variable technique. The paper identifies heterogeneities among different households based on their housing status. A $1 increase in home values leads to a $0.127 increase in spending for homeowners overall, and $0.185 for homeowners with mortgages specifically. Results reflect large responses among credit-constrained households, suggesting borrowing constraints as one of the key drivers of the MPC out of housing wealth.

Keywords: Housing Wealth, House Prices, Household Consumption.

JEL codes: E21, G51, O18.

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

Using CPI micro data for 11 euro area countries covering about 60% of the euro area consumption basket over the period 2010-2019, we document new findings on consumer price rigidity in the euro area: (i) each month on average 12.3% of prices change, which compares with 19.3% in the United States; when we exclude price changes due to sales, however, the proportion of prices adjusted each month is 8.5% in the euro area versus 10% in the United States; (ii) differences in price rigidity are rather limited across euro area countries but much larger across sectors; (iii) the median price increase (resp. decrease) is 9.6% (13%) when including sales and 6.7% (8.7%) when excluding sales; cross-country heterogeneity is more pronounced for the size than for the frequency of price changes; (iv) the distribution of price changes is highly dispersed: 14% of price changes in absolute values are lower than 2% whereas 10% are above 20%; (v) the overall frequency of price changes does not change much with inflation and does not react much to aggregate shocks; (vi) changes in inflation are mostly driven by movements in the overall size; when decomposing the overall size, changes in the share of price increases among all changes matter more than movements in the size of price increases or the size of price decreases. These findings are consistent with the predictions of a menu cost model in a low inflation environment where idiosyncratic shocks are a more relevant driver of price adjustment than aggregate shocks.

Keywords: price rigidity, inflation, consumer prices, micro data.

JEL codes: D40, E31.

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

The ‘aid conditionality’ hypothesis as advocated in the literature suggests that aid is effective in augmenting growth only in the presence of a sound policy environment. This hypothesis was so influential that its policy recommendation, to provide aid conditional upon recipient domestic policies, is currently the dominant ODA allocation criterion. However non-economic dimensions of development (political and institutional) are increasingly seen as fundamental. For this reason, this paper focuses on the linkage between aid and a noneconomic factor like Human Rights (reflecting repression and corruption) as a measure of aid effectiveness, in explaining growth outcomes across 42 Least Developed economies. We find that countries with better human rights experience positive growth from aid receipts, signifying the role of strong institutions and good governance in enabling more effective use of aid. The paper thus concludes that the measurement and monitoring of human rights provision is a useful tool in gauging the likely effectiveness of foreign aid.

Keywords: Human rights, aid effectiveness, corruption, oligarchy.
JEL Classification: F35, P16, P40, O19.

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

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.