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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 92

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

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 90

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 89

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.