Bank of Lithuania
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All results 155
No 26
2021-08-26

Business cycles in the EU: A comprehensive comparison across methods

  • Abstract

    Recently, star variables and the post-crisis nature of cyclical fluctuations have attracted a great deal of interest. In this paper, we investigate different methods of assessing business cycles for the European Union in general and the euro area in particular. First, we conduct a Monte Carlo experiment using a broad spectrum of univariate trend-cycle decomposition methods. The simulation aims to examine the ability of the analyzed methods to find the observed simulated cycle with structural properties similar to actual macroeconomic data. For the simulation, we used the structural model’s parameters calibrated to the euro area’s real GDP and unemployment rate. The simulation outcomes indicate the sufficient composition of the suite of models consisting of popular Hodrick-Prescott, Christiano-Fitzgerald and structural trend-cycle-seasonal filters, then used for the real application. We find that: (i) there is a high level of model uncertainty in comparing the estimates; (ii) growth rate (acceleration) cycles have often the worst performances, but they could be useful as early-warning predictors of turning points in growth and business cycles; and (iii) the best-performing Monte Carlo approaches provide a reasonable combination as the suite of models. When swings last less time and/or are smaller, it is easier to pick a good alternative method to the suite to capture the business cycle for real GDP. Second, we estimate the business cycles for real GDP and unemployment data varying from 1995Q1 to 2020Q4 (GDP) or 2020Q3 (unemployment), ending up with 28 cycles per country. Our analysis also confirms that the business cycles of euro area members are quite synchronized with the aggregate euro area. Some major differences can be found, however, especially in the case of periphery and new member states, with the latter improving in terms of coherency after the global financial crisis. The German cycles are among the cyclical movements least synchronised with the aggregate euro area.

    JEL Codes: C31, E27, E32.

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

No 92
2021-07-30

Firm Heterogeneity, Variable Markups, and Multinational Production: A Review from Trade Policy Perspective

  • Abstract

    This paper surveys the main ingredients and results of heterogeneous firms trade policy literature that has been developing since the early 2000s. First, I present the stylized facts regarding firm heterogeneity, firmlevel markups, and multinational production’s global structure. I then survey the trade policy papers that build on the workhorse model of firm heterogeneity. Third, I summarize the recent development of theoretical approaches of modeling the firm-level markups and its trade policy implication. Fourth, I discuss the theoretical frameworks that incorporate multinational production into heterogeneous firms’ framework and their trade policy implication. Finally, I discuss directions for future research and offer suggestions for further readings.

    Keywords: Trade policy, Firm heterogeneity, Variable markups, Multinational production.

    JEL codes: F12, F13, F23, F60.

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

No 91
2021-07-29

The Factor Analytical Approach in Trending Near Unit Root Panels

  • Abstract

    In this study, we re-visit the factor analytical (FA) approach for (near unit root) dynamic panel data models, whose asymptotic distribution has been shown to be normal and well centered at zero without the need for valid instruments or correction for bias. It is therefore very appealing. The question is: Does the appeal of FA, which so far has only been documented for fixed effects panels, extends to panels with incidental trends? This is an important question, because many persistent variables are trending. The answer turns out to be negative. In particular, while consistent, the asymptotic normality of FA breaks down when there is an exact unit root present, which limits its applicability.

    Keywords: Dynamic panel data models, Unit root, Factor analytical method

    JEL codes: C12, C13, C33

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

No 38
2021-07-22

Non price competitiveness of Lithuanian exports

  • Abstract

    Foreign trade accounts for a significant part of Lithuania’s economy and the growth of export volumes is a common occurrence in Lithuania, even with rapidly growing wages. With a growth in Lithuania’s exports, the share of exports is also increasing. This indicates that Lithuanian-origin goods and services are competitive in the international market. The competitiveness of Lithuanian-origin exports may be of two kinds: based on the price and costs and based on other, non-price, factors. This article examines two methods of exports competitiveness calculation. When examining exports competitiveness based on the first method, standard formulation for the export equation, regressions are drawn up where exports growth is a dependent variable, whereas demand and the real effective exchange rates (reflecting the impact of prices and costs) are independent variables. Residual variance (i.e. random value) is seen as non-price factors that influence exports growth. When examining exports competitiveness based on the second method, exports of goods are analysed more closely, broken down into four competitiveness groups. The results indicate that the competitiveness of Lithuanian-origin exports in 2001-2019 was essentially determined by factors other than price or costs. In other words, the labour cost growth experienced by exporters is not a key factor that influences the competitiveness of Lithuanian-origin exports.

    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 37
2021-05-24

Joint Debt Arrangements in EMU: From NextGenEU to Eurobonds

  • Abstract

    EU’s landmark Next Generation EU programme is an important step forward in both European crisis response and, more generally, EMU deepening, given that the package features elements of both joint debt issuance and fiscal transfers. This paper analyses the programme in comparison to other most prominent joint EMU debt proposals and provides a comparative Scoreboard of the arrangements discussed. It concludes that Next Generation EU falls short of filling in key gaps in the current architecture of the EMU – in particular, the gap laid bare by the lack of a genuine European safe asset. A true “safe haven” instrument – a Eurobond with joint and several guarantees – could move the EMU into a closer alignment with the Optimum Currency Area (OCA) criteria and help compensate for the macroeconomic intra-euro area imbalances. The guarantee structure of the Eurobond, working as an insurance mechanism for Member States’ sovereign debt, would allow for joint debt to significantly strengthen the euro area’s macroeconomic and market stability, the financial sector, or the international role of the Euro. However, issuance of the Eurobond is associated with important moral hazard, political and legal risks, and would most of all require an unprecedented level of trust by Member States.

    The views expressed are those of the authors and do not necessarily represent those of the Bank of Lithuania.

     

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.

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