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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 125
2024-09-23

Consumer price rigidity in the Baltic states during periods of low and high inflation

  • Abstract

    The Baltic states experienced the most substantial consumer price inflation of any of the EU countries shortly after the COVID-19 pandemic. The year-on-year all-items inflation rate averaged 11% from January 2021 to September 2023, peaking at around 22% in late 2022. This study examines how consumer price rigidity in the region during this period of high inflation differed from the preceding period of low inflation in 2019-2020. We use the detailed price records that underlie the official consumer price indexes to assess the frequency and the size margins of price changes. The average frequency of price changes increased by about four percentage points when inflation was high, as an increase of five percentage points in the frequency of price increases combined with a fall of one percentage point in the frequency of price cuts. The average size of price changes increased by 2.8 percentage points, mainly because the share of price increases changed. We further show that structural shocks in energy prices and aggregate demand contributed significantly to fluctuations in the inflation rate through the frequency of price changes during the period of high inflation. All this points to pricing being state-dependent in the Baltic states.

    Keywords: consumer price rigidity, price-setting, high inflation, frequency of price changes.

    JEL classification: D40, E31.

No 124
2024-06-11

Life-cycle Worker Flows and Cross-country Differences in Aggregate Employment

  • Abstract

    We document how worker flows between employment, unemployment, and out of the labor force, vary by age and gender for a large panel of European countries. We develop and calibrate an extended Diamond-Mortensen-Pissarides model that captures all the salient features of these data. The model assigns a major role to the production technology in driving differences in aggregate employment, while, in contrast to Standard analyses, labor-market policies play only a secondary role. Search intensity and a laborforce participation decision are key for propagating the effects of technology across age and gender groups, and for explaining the variation in aggregate employment.

    Keywords: Employment, Unemployment, Labor Force Participation, Life cycle, Worker Flows, Labor Market Institutions

    JEL classification: E02, E24, J21, J64, J82

No 123
2024-05-31

The term structure of judgement: interpreting survey disagreement

  • Abstract

    Consensus forecasts by professionals are highly accurate, yet hide large heterogeneity. We develop a framework to extract the judgement component from survey forecasts and analyse the extent to which it contributes to respondents’ disagreement. For the average respondent, we find a substantial contribution of judgement about the current quarter, which often steers unconditional forecasts towards the realisation, thereby improving accuracy. We identify the structural components of judgement by exploiting stochastic volatility and give an economic interpretation to expected future shocks. For individual respondents, just over one-third of the disagreement is due to differences in the coefficients or models used, and the remainder is due to different assessments of future shocks; the latter mostly concerns the size of the shocks, while there is general agreement on their source.

    Keywords: Expectations Formation, Identification via Stochastic Volatility, Judgement, Survey of Professional Forecasters

    JEL classification: C32, C33, C51, D84, E37

No 122
2024-04-22

Household Spending Dynamics: The Impact of House Price-Rent Spread and Credit Constraints

  • Abstract

    This paper explores how fluctuations in the house price-rent spread influence household spending, taking into account credit constraints. We incorporate a housing spread shock, representing changes in the future value of residential property, into a model of household decisionmaking with borrowing frictions. Using halfcentury data from 28 OECD countries, we find that housing spread shocks are more persistent than credit shocks, which induce ‘boom-bust’ dynamics. We also identify asymmetries once the joint effect of shocks to housing spread and borrowing frictions is analyzed, particularly in crisis periods, underscoring the importance of policies addressing credit conditions and household expectations to stabilize the economy when traditional tools are less effective.

    Keywords: household expectations; house price-rent spread; credit frictions; interest rates; household consumption

    JEL classification: D15, E21, E5, G51