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Working Paper Series

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Working papers disseminate economic research relevant not only to the tasks and functions of the Bank of Lithuania and of the European System of Central Banks but also appealing more broadly to the academic community in economics and finance. They present, discuss and analyse the results of original and academically rigorous theoretical and/or empirical research. Working papers constitute the basis for publications in leading academic journals, making contributions to the existing literature in the fields of economics and finance. They encourage collaboration between the researchers of the Bank of Lithuania and other central banks, Lithuanian and foreign universities and research institutes.

Papers are only available in English.

No 77
2020-06-18

Macroeconomic implications of insolvency regimes

  • Abstract

    The impact of creditor and debtor rights following firm insolvency are studied in a firm dynamics model where defaulting firms choose between restructuring or exit. The model accounts for differing effects of productivity shocks across economies that differ in the credit/debtor rights. Following a negative shock labour productivity falls sharply in a creditor-friendly regime such as the UK while in a debtor-friendly regime such as the US, there is a larger employment response. This paper suggests a possible explanation for the different employment and labour productivity response in the UK and US since the financial crisis.  

    JEL Codes: D21, E22, G33.

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

No 76
2020-06-18

Workers' job mobility in response to severance pay generosity

  • Abstract

    This paper studies the impact of severance pay generosity on workers' voluntary mobility decisions. The identification strategy exploits a major labor market reform in Spain in February 2012 together with the exposure of some workers to a layoff shock. I rely on rich administrative data to estimate a discrete time duration model with dynamic treatment effects. The results show that a decrease in mobility costs induced by a reduction in severance pay made workers who expected to be displaced in the near future more likely to voluntarily leave their employers. The results indicate that policies targeting employers may also affect workers' behavior. They further reveal the relevance of taking into account interactions between employment protection and unemployment insurance.

    JEL Codes: J62, J63, J65.

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

No 75
2020-03-26

Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs

  • Abstract

    In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.

    JEL Codes: E31, F31, F45.

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

No 74
2020-03-13

Assessing credit gaps in CESEE based on levels justified by fundamentals – a comparison across different estimation approaches

  • Abstract

    Also published in the Oesterreichische Nationalbank Working Paper Series, no. 229/2020.


    Relying on a rich panel regression framework, we study the role of different “fundamental” credit determinants in Central, Eastern and Southeastern European (CESEE) EU Member States and compare actual private sector credit-to-GDP ratios to the derived fundamental levels. It turns out that countries featuring positive credit gaps at the start of the global financial crisis (GFC) have managed to adjust their credit ratios downward toward levels justified by fundamentals, but the adjustment is apparently not yet complete in all countries. In addition, negative credit gaps have emerged or widened in most countries that had seen credit levels close to or below the fundamental levels of credit at the start of the GFC. The estimated speed of adjustment implies that at the end of the review period, there was still a rather long way to go for countries with very large credit gaps.

    JEL Codes: C33, E44, E51, G01, G21, O16.

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

No 73
2020-02-18

Banking regulation and collateral screening in a model of information asymmetry

  • Abstract

    This paper explores the impact of banking regulation on a competitive credit market with ex-ante asymmetric information and aggregate uncertainty. I construct a model where the government to impose a regulatory constraint that limits the losses banks make in the event of their default. I show that the addition of banking regulation results in three deviations from the standard theory. First, collateral is demanded of both high and low risk firms, even in the absence of asymmetric information. Second, if banking regulation is sufficiently strict, there may not exist an adverse selection problem. Third, a pooling Nash equilibrium can exist.

    JEL Codes: D86, G21, G28.

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

No 72
2020-02-07

Statutory, effective and optimal net tax schedules in Lithuania

  • Abstract

    We estimate effective and optimal net income tax schedules and compare them to estimated statutory rates for the case of Lithuania in the period 2014-2015. Values of effective net tax rates are estimated from the survey of EU Statistics on Income and Living Conditions, the statutory net tax rates are estimated with the European tax-benefit simulator Euromod, while optimal net taxes are calculated via Saez (2002) methodology. We find that the three net tax schedules are similar for employees in the middle of the income distribution. At the bottom of the income distribution, optimal net tax schedules suggest higher in-work benefits. The net tax schedules diverge substantially for the self-employed. At the top of the income distribution, where the majority of self-employed are concentrated, the self-employed are required to pay 15 cents less net taxes per euro than employees - and they effectively pay 29 cents less.

    JEL Codes: H2, H21.

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

No 71
2020-01-24

Changes in income inequality in Lithuania: the role of policy, labour market structure, returns and demographics

  • Abstract

    We model the household disposable income distribution in Lithuania and explore the drivers of the increase in income inequality between 2007 and 2015. We quantify the contributions of four factors to changes in the disposable income distribution: (i) demographics; (ii) labour market structure; (ii) returns and prices; and (iv) tax-benefit system. Results show that the effects of the factors were substantial and reflected heterogeneous developments over two sub-periods: changes in the tax and benefit system successfully accommodated a rapid rise in market income inequality due to the global financial crisis during 2007-2011, but failed to do so during the subsequent years of economic expansion, when rising returns in the labour and capital markets significantly increased disposable income inequality. We also find that declining marriage rates contributed to the increase of income inequality in Lithuania.

    JEL Codes: D31, H23, J21, J31, I38.

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