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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 100

State-Contingent Forward Guidance

  • Abstract

    This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.

    Keywords: New Keynesian model, Search and matching, ZLB, Forward guidance.

    JEL codes: E30, J60.

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

No 99

Optimal Tariffs with Firm Heterogeneity, Variable Markups, and FDI

  • Abstract

    Variable markups and multinational production have gathered considerable attention in the trade literature because of their empirical prevalence and welfare implications. This paper studies the welfare implication of tariffs and optimal tariffs in an environment that features firm heterogeneity, variable markups, and FDI. I find: (i) Tariffs endogenously affect firm entry level, producing different comparative statics in the short run versus long-run. (ii) Variable markups generate multiple externalities in this economy, causing market outcome to differ from the socially optimum outcome systematically. Permitting tariff-jumping FDI can lower the domestic cutoff levels and reduce the misallocation in the economy. (iii) Free trade is not always socially optimal. If the domestic marginal cost cutoff is sufficiently high, a positive tariff can be welfare-improving since it encourages firm entry. The Nash equilibrium tariff level will also be higher than the socially optimal tariff. (iv) The interaction of variable markup and FDI generates novel welfare implications that are absent if consumers possess CES preference.

    Keywords: Optimal tariff, Firm heterogeneity, Misallocation, Variable markups, FDI.

    JEL codes: F12, F13, F23, F60, R13.

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

No 98

Financial Development, Reforms and Growth

  • Abstract

    Is there any specific structure of the financial system which promotes economic growth or does this structure depend on the level of economic growth itself? Financial development and financial reforms affect economic growth, but less is known on how this effect varies across different levels of the conditional distribution of the growth rates. We examine this by using panel data for 81 countries for more than 30 years. We account for unobserved heterogeneity and operate within alternative econometric approaches. The findings indicate that financial reforms are important determinants of growth, especially when a country faces relatively low levels of economic growth. Financial development does matter for growth, however, the size and significance of the effect vary. Financial reforms affect economic growth more than financial development. We reveal that the components of financial reforms, which are more important for economic growth, are the supervision of banks and the regulation of securities markets.

    Keywords: Financial Development, Financial Reforms, Economic Growth, Quantile Regression, Panel Data.

    JEL codes: O16; O40; G10; G20; C21; C23.

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

No 97

Identifying High-Frequency Shocks with Bayesian Mixed-Frequency VARs

  • Abstract

    We contribute to research on mixed-frequency regressions by introducing an innovative Bayesian approach. We impose a Normal-inverse Wishart prior by adding a set of auxiliary dummies in estimating a Mixed-Frequency VAR. We identify a high frequency shock in a Monte Carlo experiment and in an illustrative example with uncertainty shock for the U.S. economy. As the main findings, we document a “temporal aggregation bias” when we adopt a common low-frequency model instead of estimating a mixed-frequency framework. The bias is amplified in case of a large mismatching between the high-frequency shock and low-frequency business cycle variables.

    Keywords: Bayesian mixed-frequency VAR, MIDAS, Monte Carlo, uncertainty shocks, macro-financial linkages.

    JEL codes: EC32, E44, E52.

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