Bank of Lithuania
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All results 150
No 90
2021-05-17

Two-Stage Instrumental Variable Estimation of Linear Panel Data Models with Interactive Effects

  • Abstract

    This paper analyses the instrumental variables (IV) approach put forward by Norkutė et al. (2021), in the context of static linear panel data models with interactive effects present in the error term and the regressors. Instruments are obtained from transformed regressors, thereby it is not necessary to search for external instruments. We consider a two-stage IV (2SIV) and a mean-group IV (MGIV) estimator for homogeneous and heterogeneous slope models, respectively. The asymptotic analysis reveals that: (i) the √NT-consistent 2SIV estimator is free from asymptotic bias that may arise due to the estimation error of the interactive effects, whilst (ii) existing estimators can suffer from asymptotic bias; (iii) the proposed 2SIV estimator is asymptotically as efficient as existing estimators that eliminate interactive effects jointly in the regressors and the error, whilst; (iv) the relative efficiency of the estimators that eliminate interactive effects only in the error term is indeterminate. A Monte Carlo study confirms good approximation quality of our asymptotic results.

    Keywords: Large panel data, interactive effects, common factors, principal components analysis, instrumental variables.

    JEL codes: C13, C15, C23, C26.

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

No 25
2021-05-11

ECB Communication: What Is It Telling Us?

  • Abstract

    This paper examines changing ECB communication and how it has impacted euro area financial markets over the past two decades. We applied a combination of topic modelling and sentiment analysis for over 2000 public ECB Executive Board member speeches, as well as over 200 ECB press conferences. Topic analysis revealed that the ECB’s main focus has shifted from strategy and objectives, at the inception of the euro area, to various policy actions during the global financial crisis and, more recently, to instruments and economic developments. Sentiment analysis showed an expected trend of a more negative communication tone during periods of turmoil and a gradual shift to a more dovish monetary policy tone over time. Regression analysis revealed that sentiment indices had the expected impact on financial market indicators, while press conferences showed substantially stronger effects than speeches.

    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.

No 89
2021-04-22

The macroeconomics of carry trade gone wrong: Corporate and consumer losses in emerging Europe

  • Abstract

    This paper analyzes the macroeconomic consequences of foreign currency losses by banks, corporates and consumers in order to find whether some allocations of losses are better from a macroeconomic perspective than others. To that end, we construct a New Keynesian DSGE model with debt overhang for corporate borrowers, monitoring costs for household mortgage debt and leverage constraints for banks. The Hungarian experience at the end of 2008 and model estimation on Hungarian data motivate these financial frictions. Model simulation shows that making corporate borrowers bear currency risk results in worse macroeconomic outcomes than shifting currency mismatch losses to banks. Foreign currency mortgages to households, however, generate lower output than currency mismatch in the banking sector. The fact that households do not suffer from debt overhang, among other reasons, is driving this result.

    Keywords: Currency mismatch, household debt, corporate debt, leveraged banks, small open economy, Bayesian estimation

    JEL codes: E44, G21, F41, P2.

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

No 88
2021-03-31

What Moves Treasury Yields?

  • Abstract

    We characterize the joint dynamics of a large number of macroeconomic variables and Treasury yields in a dynamic factor model. We use this framework to identify a yield curve news shock as an innovation that does not move yields contemporaneously but explains a maximum share of the forecast error variance of yields over the next year. This shock explains more than half, and along with contemporaneous shocks to the level and slope of the yield curve, essentially all of the variation of Treasury yields several years out. The news shock is associated with a sharp and persistent increase in implied stock and bond market volatility, falling stock prices, an uptick in term premiums, and a prolonged decline of real activity and inflation. The accommodative response by the Federal Reserve leads to persistently lower expected and actual short rates. Treasury yields do not react contemporaneously to the yield curve news shock as the positive response of term premiums and the negative response of expected short rates initially offset each other. Identified shocks to realized and implied financial market volatility imply essentially the same impulse responses and are highly correlated with the yield news shock, suggesting that they act as unspanned or hidden factors in the yield curve.

    Keywords: term structure of interest rates, yield curve, news shocks, uncertainty shocks, structural vector autoregressions, factor-augmented vector autoregressions.                                                                                                                                                                  
    JEL codes: C55, E43, E44, G12.

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

No 87
2021-03-26

Dancing Alone or Together: The Dynamic Effects of Independent and Common Monetary Policies

  • Abstract

    What would have been the hypothetical effect of monetary policy shocks had a country never joined the euro area, in cases where we know that the country in question actually did join the euro area? It is one thing to investigate the impact of joining a monetary union, but quite another to examine two things at once: joining the union and experiencing actual monetary policy shocks. We propose a methodology that combines synthetic control ideas with the impulse response functions to uncover dynamic response paths for treated and untreated units, controlling for common unobserved factors. Focusing on the largest euro area countries, Germany, France, and Italy, we find that an unexpected rise in interest rates depresses inflation and significantly appreciates exchange rate, whereas GDP fluctuations are less successfully controlled when a country belongs to the monetary union than would have been the case under the independent monetary policy. Importantly, Italy turns out to be the overall beneficiary, since all three channels – price, GDP, and exchange rate – deliver the desired results. We also find that stabilizing an economy within a union requires somewhat smaller policy changes than attempting to stabilize it individually, and therefore provides more policy space.

    Keywords: Dynamic causal effects; Monetary union; Price puzzle; Common factors.

    JEL codes: C14; C32; C33; E52.

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

No 36
2021-03-24

Overview of business-wide assessments of money laundering and terrorist financing risks performed by financial market participants

  • Abstract

    The Overview provides key insights into business-wide assessments of money laundering and terrorist financing risks performed by financial market participants. The Overview is based on conclusions obtained by the Bank of Lithuania from the supervision of financial market participants and on an analysis of risk assessments of 20 financial market participants (banks, electronic money institutions and payment institutions) and contains examples of good practice identified during the analysis and cases where risk assessments need to be improved.

No 86
2021-03-19

Productivity-Enhancing Reallocation during the Great Recession: Evidence from Lithuania

  • Abstract

    This paper studies the impact of the Great Recession on the relationship between reallocation and productivity dynamics in Lithuania. Using detailed microlevel data, we first document the aggregate contribution of firm exit and employment reallocation to productivity growth. Next, we estimate firm-level regressions to confirm the findings and to perform a heterogeneity analysis. This analysis shows that productivity shielded firms from exit, and that this relationship became stronger during the Great Recession. Moreover, we demonstrate that more productive firms experienced on average lower employment losses, and that this effect was even stronger during the economic slump. Taken together, our results suggest that reallocation was productivity-enhancing during the Great Recession. However, the analysis also indicates that reallocation intensity varied with sector's dependence on external financing or international trade as well as market concentration.

    Keywords: firm dynamics, job reallocation, productivity, Great Recession

    JEL Codes E24, E32, L11, J23

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

No 24
2021-03-10

Natural real rates of interest across euro area countries: Are R-stars getting closer together?

  • Abstract

    Using two different methodologies, we estimate time-varying natural real rates of interest for a majority of euro area (EA) countries, including Lithuania. We find that natural real rates have been declining, particularly since 2008, albeit to different extent across EA countries. Lower rates could (at least partly) be explained by lower productivity and population growth. In line with previous literature, we find evidence of a substantial dispersion of the natural interest rate across EA economies. This became especially evident during the financial crisis of 2008-2009 and the sovereign debt crisis of 2010-2012, while estimates of natural rates tend to converge during "calm" periods. Estimates of natural rates for Lithuania were significantly above the estimates of core EA countries over 2002-2008, but this has changed after the crisis. From 2011 the estimates of natural rates for Lithuania tend to be close to the average for EA countries.

    JEL Codes: C32, E32, E43, E52.

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

No 35
2021-02-10

A picture of investment in Lithuania

  • Abstract

    This article analyses Lithuania’s investment environment by reviewing investment structure and its changes, assessing the impact of Lithuania’s economic structure on investment performance, revealing the main drivers behind Lithuania’s investment development, showing the interaction between government and business investment and assessing the impact of foreign capital on the country’s economic development. The article shows that the investment to value added ratio in Lithuania is lower than the EU average, which may be partially related to low investment intensity of the main economic activities. It has been identified that the main drivers of investment development in Lithuania are demand variables, such as foreign demand and private consumption. The analysis of government investment revealed that this investment seems to “crowd in” business investment rather than crowding it out. Lithuania’s public infrastructure level is close to the indicator of developed countries, therefore, new investment should be mainly focused on the maintenance of the current infrastructure. In terms of attracting foreign direct investment (FDI), Lithuania is lagging behind other Central and Eastern European countries. The reserves of qualified labour, which made the largest contribution to the attraction of FDI, may be depleted in the medium- or long-term period. The potential for foreign capital inflows could be boosted by the regionalisation processes and value chain shortening highlighted by the COVID-19 crisis as well as by larger-scale digitalisation and automation. The article analyses investment dynamics in Lithuania and reflects its current state, while its future will depend on individual actions of decision-makers and the allocation of limited public and private resources in the right direction.

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


    Available only in Lithuanian

No 85
2021-01-11

What Explains Excess Trade Persistence? A Theory of Habits in the Supply Chains

  • Abstract

    International trade flows are volatile, imbalanced, and fragmented across off-shored supply chains. Yet, not much is known about the mechanism through which trade flows adjust in response to shocks over time. This paper derives a dynamic gravity equation from a theory of habits in the supply chains that generates autocorrelated bilateral trade flows that are heterogeneous across different country pairs. We estimate our version of the dynamic gravity equation for 39 countries over the period of 1950-2014 and find that the transmission of local and global trade shocks is fundamentally different. We show that the trade persistence coefficient falls from 0.91 to 0.35 when we depart from the existing empirical gravity models that draw inference from the pooled coefficient estimates without controlling for the variation in the unobservable global factors. Thus, our approach escapes the excess trade persistence puzzle and adds to the explanation of the sharp decline and the rapid recovery of the global trade flows during the "Great Trade Collapse" of 2008-09. In addition to the traditional variables in the gravity equation, we also show that a cross-country habit asymmetry creates bilateral and multilateral trade imbalances, which are an important determinant of bilateral trade flows both theoretically and empirically.

    Keywords: Dynamic Gravity Equation; Habits; Trade Persistence; Trade Imbalance; Global Shocks; Parameter Heterogeneity.                                                                                                                                                                   
    JEL codes: C23, F14, F41, F62.

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

No 84
2020-12-30

Global Impacts of US Monetary Policy Uncertainty Shocks

  • Abstract

    We build a new empirical model to estimate the global impact of an increase in the volatility of US monetary policy shocks. Specifically, we admit time-varying variances of local structural shocks from a stochastic volatility specification. By allowing for rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate.  Moreover, we document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy.

    Keywords: US Monetary Policy, Volatility Shocks, Uncertainty, Global Economy.

    JEL Codes: C32, C54, E52, E58, F44.

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

No 83
2020-12-29

Exchange rate fluctuations and the financial channel in emerging economies

  • Abstract

    This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyse whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks transmission covering 11 emerging market countries for the period 2000Q1-2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand with regard to foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to appreciation) decreases GDP. The financial channel works mostly in the short-run except for Brazil, Malaysia and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rates.

    Keywords: emerging markets, financial channel, exchange rates, global liquidity.

    JEL Codes: F31, F41, F43, G15.

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