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No 85

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

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

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.

No 82

Statistical Discrimination in a Search Equilibrium Model: Racial Wage and Employment Disparities in the US

  • Abstract

    In the US, black workers spend more time in unemployment, lose their jobs more rapidly, and earn lower wages than white workers. This paper quantifies the contributions of statistical discrimination, as portrayed by negative stereotyping and screening discrimination, to such employment and wage disparities. We develop an equilibrium search model of statistical discrimination with learning based on Moscarini (2005) and estimate it by indirect inference. We show that statistical discrimination alone cannot simultaneously explain the observed differences in residual wages and monthly job loss probabilities between black and white workers. However, a model with negative stereotyping, larger unemployment valuation and faster learning about the quality of matches for black workers can account for these facts. One implication of our findings is that black workers have larger returns to tenure.

     Keywords: Learning; Screening discrimination; Job search; Indirect inference.

    JEL Codes: J31; J64; J71.

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

No 81

Fiscal DSGE Model for Latvia

  • Abstract

    We develop a fiscal dynamic stochastic general equilibrium (DSGE) model for policy simulation and scenario analysis purposes tailored to Latvia, a small open economy in a monetary union. The fiscal sector elements comprise government investment, government consumption, government transfers that are asymmetrically directed to both optimizing and hand-to-mouth households, cyclical unemployment benefits, foreign ownership of government debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. A particular finding is that having foreign ownership of government debt generally breaks the Ricardian equivalence paradigm.

    JEL codes: E0, E2, E3, F4, H2, H3, H6

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

No 80

Assessing the impact of macroprudential measures: The case of the LTV limit in Lithuania

  • Abstract

    In this paper, we adopt a dual micro-and-macro simulation strategy to assess the impact of introducing (or changing) the LTV limit. Due to the nature of borrower-based macroprudential measures, to assess this impact we need to use borrower-level micro data. Tightening (or loosening) the LTV limit increases the share of borrowers constrained by the policy measure in question; thus, the overall impact depends on initial market conditions. We find that the introduction of an LTV limit of 85 % in 2011 had a modest short-term impact on economic activity because the new regulatory limit was non-binding for most borrowers at the time. We estimate that if the LTV limit would not have been introduced, the household loan portfolio would have grown on average 1.5 percentage points faster per year (over 2012-2014). This would have led to a 0.5 percentage point higher housing price growth and a 0.2 percentage point higher real GDP growth. When the macroprudential LTV limit is binding for a significant portion of borrowers, lowering the LTV limit at current market conditions has a much more pronounced effect. We show that if the LTV limit had been implemented at the end of 2004, it would have substantially helped in tempering the credit and housing boom, albeit at the cost of lowering economic growth.

    Keywords: Financial stability, Macroprudential policy, Borrower-based macroprudential policy instruments, LTV limit.

    JEL Codes: C32, C53, E58, G28.

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

No 23

A First Glance at the Minimum Wage Incidence in Lithuania using Social Security Data

  • Abstract

    This document explores the incidence of the minimum wage in Lithuania. The descriptive analysis exploits high-frequency data on monthly labor income coming from Social Security records between July 2013 and July 2020 to characterize (i) the evolution of the monthly minimum wage, (ii) the percentage of workers who earn the minimum wage, (iii) the bite of the minimum wage in the wage distribution, and (iv) the heterogeneity of the findings with respect to gender and age. The evidence shows that the minimum wage was raised 7 times with an average (real) increase of 7.3% and, on average, less than 10% of the workers earn at most the minimum wage but low-pay incidence is around 20%. In terms of the impact of the wage distribution, the minimum wage relative to the average wage in the economy fluctuates between 45 and 50 percent. Females and young workers exhibit a larger low-pay incidence and minimum wage bite.

    JEL Codes: J38, J48

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

No 22

An analysis of investments and their drivers in Lithuania

  • Abstract

    The article analyzes recent developments in investments in Lithuania using a broad set of possible drivers, including EU funds. We apply a Bayesian VAR setup with data from 1997Q1 to 2019Q4. We also examine and compare business vs. government investments and different types of investments, especially innovative investments. We find that total investments are basically driven by the data on business investments. The main outcomes are mostly in line with the literature, but we do see some crucial differences across types. Key results include: (1) a small role for lending rates as compared to other factors, largely limited to the global financial crisis; (2) the crucial role of demand-side variables, i.e. foreign demand or private consumption; (3) pro-cyclicality in government investments and a positive correlation with business investments; (4) the importance of uncertainty for some sectors, that positively drives only the more innovative/intangible investments; and (5) despite the fact that EU funds do feed investments, there is a crowding-out in the short run for business-related investments, while there is some positive contribution to public investments.


    JEL Codes: E32, D24, D61, C32.

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

No 34

Overview of Compliance with the Corporate Governance Code for the Companies Listed on NASDAQ Vilnius

  • Abstract

    In this Overview, the Bank of Lithuania (LB) aims to assess the way companies disclose information on compliance with the recommendations set out in the principles of the Corporate Governance Code for the Companies Listed on Nasdaq Vilnius (hereinafter – the CGC). In 2017, when Lithuania was pursuing its accession to the OECD, major amendments were implemented in the Republic of Lithuania Law on Companies regarding ensuring the supervisory function of public limited liability companies whose shares are admitted to trading on a regulated market, ensuring the independence of collegial bodies formed by these companies, establishing requirements for transactions with a related party and their disclosure, establishing the shareholder’s right to submit questions to the company in advance, etc. This was also largely due to the recast of the CGC on 15 January 2019, as well as the new form of compliance.

    This overview assesses the information disclosed by 26 companies whose shares are admitted to the main and secondary trading lists of Nasdaq Vilnius, AB. The type of activity and specificity of these companies often also determine the specific features of their corporate governance (the structure and composition of bodies, etc.). An assessment of the responses provided by the companies in the reporting form of the CGC with regard to their compliance with recommendations shows that they consider the recommendations to be followed very well (except for principles 5 and 7, where quantitative indicators are lower).

No 79

Euro Area Monetary Communications: Excess Sensitivity and Perception Shocks

  • Abstract

    We explore new dimensions of the ECB’s monetary communications using the Euro Area Monetary Policy Event-Study Database (EA-MPD) built by Altavilla et al. (2019). We find that three new factors are needed to capture an excess sensitivity of long-term sovereign yields around monetary announcements. "Duration" surprises cause variations in real long-term rates and are mainly transmitted by term premiums. The "Sovereign spread" and "Save the Euro" surprises greatly influence the long-term yields of the periphery countries. These effects are difficult to reconcile with classic monetary policy shocks. We therefore study their underlying nature and discover that they have the characteristics of "Information", or what we label "Perception" shocks.

    Keywords: Monetary surprises, Event-study, Excess sensitivity, Perception shocks, High-frequency Identification.

    JEL Codes: E43, E44, E52, E58, G12.

No 33

Assessment of the impact of the euro introduction on Lithuania’s economy during the first five years of membership in the euro area

  • Abstract

    This paper examines the impact of the euro adoption on the economy of Lithuania during its first five years (2015-2019) as a member of the euro area. First, it assesses the impact of the euro adoption in Lithuania on interest rates and real exports, after which it investigates the impact on Lithuanian macroeconomic indicators with a LTDSGE model, using impulse response functions obtained in 2013 in research conducted by the Bank of Lithuania. The paper further estimates the impact of the euro adoption on Lithuanian macroeconomic indicators using the synthetic control method (SCM). The results of this paper confirm the main conclusions of the aforementioned 2013 study, namely, that the long-term benefits of the euro adoption were much higher than the costs, which were mainly short-term or could even be considered as valuable investments. 

    JEL Codes: E17, E52, F33, F45

    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 78

Bowling Alone, Buying Alone: The Decline of Co-Borrowers in the US Mortgage Market

  • Abstract

    Using the universe of mortgage applications data and detailed credit performance data, we document that since the early 1990s there was a significant decline in the share of mortgages with co-borrowers. Although the decline was an almost universal phenomenon across different regions of the US, the rate of the decline showed significant spatial heterogeneity and in turn had implications for regional differences in economic activity. We show that the presence of a co-borrower reduces the mortgage default probability by more than 50 percent for both prime and subprime loans and those regions that had a lower co-borrower share prior to the crisis experienced higher mortgage default rates over the period 2007-2010. Higher default rates created spillovers on economic activity during the Great Recession: a lower co-borrower share at the regional level was also related to persistently lower house price growth, refinancing growth and mortgage credit growth. These results imply that the decrease in the share of mortgages with co-borrowers made the US mortgage market more vulnerable to the financial crisis and contributed to the divergence in economic outcomes across different regions.

    JEL Codes: G21, G51, R21. 

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

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