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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 85
2021-01-11

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
2020-12-30

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
2020-12-29

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
2020-12-18

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.