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Occasional Paper Series

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Occasional papers feature analytical descriptive or discussion articles and extended commentaries prepared by the Bank of Lithuania staff on subjects relevant for central banking. The papers within the series analyse topical questions and issues relevant to the activities of the Bank of Lithuania, introduce the results of analytical and policy work conducted at the institution, explaining its decisions and opinions. Occasional papers target a wider audience, including policymakers, financial analysts, academics, the media and the general public. 

Papers are available in Lithuanian or English.

No 45

Combating Climate Change through Policy Instruments. A Meta-Analysis of Carbon Taxation

  • Abstract

    Recently, there has been a surge of interest in policies that target climate change. This paper begins by discussing why policymakers, and central banks in particular, should be concerned about climate change, and goes on to argue why carbon pricing is an appropriate political instrument to reduce greenhouse gas (GHG) emissions. The paper details two categories of carbon pricing, namely carbon taxation and the introduction of Emission Trading Systems (ETSs), illustrating why a carbon tax is the more efficient instrument. Popular models for optimal carbon taxation and implications of carbon taxation are discussed. The paper concludes with recommendations to policymakers, which include advocacy of differentiated rather than uniform carbon taxation, phased-in carbon taxation instead of a blanket approach, introduction of the carbon border adjustment mechanism (CBAM), and Green Quantitative Easing (QE).

    Keywords: carbon taxation, climate change, green QE.

    JEL Codes: Q54, Q58, H23, E51, E62

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

No 44

Wage Growth in Lithuania from 2008 to 2020: Observed Drivers and Underlying Shocks

  • Abstract

    This paper studies the drivers of wage growth in Lithuania over the period 2008-2020. Using administrative data as well as aggregate measures reflecting the state of the economy, we estimate an extended version of a wage Phillips curve. Our reducedform estimates indicate that nominal wage growth was tightly linked to labor market fluctuation over this period. Labor productivity, changes in the minimum wage, and the composition of employment also contributed to wage dynamics. However, we find little evidence that past inflation has been a push factor. To understand the underlying economic primitives behind our findings, we estimate a structural Bayesian autoregressive model. Our structural analysis reveals a significant contribution from aggregate supply shocks, reflecting a stronger relationship between productivity and wages than implied by our reduced-form estimates. Moreover, the historical decomposition reveals that since 2013, wages grew over and above productivity due to rising aggregate demand and labor market disturbances.

No 43

What drove the rise in bank lending rates in Lithuania during the low-rate era?

  • Abstract

    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.



No 42

Housing and credit misalignments in a two-market disequilibrium framework

  • Abstract

    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.