Publications

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.

During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth.

JEL Codes: C23, E40, F33, F43.

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

The objective of increased regulation of mortgage origination activities after the Great Recession was to prevent another foreclosure crisis in the future. However, the literature is not conclusive about the actual effect of these policy changes. By using the 2007-09 panel and subsequent waves of the Survey of Consumer Finances (SCF), we predict foreclosure risk based on individual borrower characteristics. We show that the median mortgage foreclosure probability kept decreasing after 2010, but in 2016 it was still higher relative to the year 2007. The median foreclosure probability has remained high among both non-bank borrowers and bank borrowers. The regulatory changes started in 2010, so we also compare predicted foreclosure probabilities to the levels in 2010 and find that, despite the fact that banks were affected by this regulation more than non-banks, predicted foreclosure probabilities for bank mortgages declined slower than for non-bank mortgages. Our findings offer support for a thorough analysis of the regulatory effects because they might have been weaker than expected or worked in an unexpected way.

JEL Codes: C53, G21, G23.

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

The empirical and theoretical evidence on the inflation impact of population aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations, - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first to discuss, using this framework, how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. Further, we are also the first to examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce with aging, our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in more gray societies central banks should react more strongly to nominal variables, and in a very old society the nominal GDP targeting rule might become the most effective monetary policy rule to compensate for higher inflation volatility. 

JEL Codes: E31, E52, J11.

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

Do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed? Since economic theory usually pays attention to the steady state change and ignores business cycle interactions of structural reforms, we connect local projection methodology with the Mallow’s C_p averaging criterion to arrive at an inference that does not require knowledge of the exact functional form, is robust to mis-specification, admits non-linearities, and cross-sectional dependence and addresses uncertainty regarding interactions between labor reforms and macroeconomy. We also develop a test to check the importance of monetary policy for any horizon and the entire impulse response function, taking the multiple testing problem into account. We document that replacement rates deliver substantially different outcomes on real GDP, inflation and real effective exchange rate, whereas labor activation schemes bear different effects on unemployment in low- and high-interest rate environments. There is also evidence of monetary policy trend playing an important role as well as increasing synchronized monetary and labor market policies across European countries.

JEL Codes: C33, C54, E52, E62, J08, J38.

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

This study investigates the direct and intersectoral network effects of idiosyncratic TFP shocks on sectors’ growth in the context of US manufacturing industries. To deal with the potential endogeneity of TFP, we propose a novel set of instruments for contemporaneous regressors. These instruments are technology shocks identified via sign restriction from sectoral SVAR models. Using US input-output tables and industry-level data, we quantify direct and network-based effects of the shocks. Our results show that idiosyncratic technology shocks propagate mostly downstream the network. In addition, we capture strong contemporaneous direct effects of the shocks.

JEL Codes: C36, C67, D24, E32.

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

This study investigates the role of intersectoral networks in the transmission of aggregate technology shocks to sectors’ growth. First, we develop a theoretical model to obtain insights into the propagation of shocks through input-output linkages, which suggests that the network effect arises via sectoral downstream linkages. We then quantitatively assess this theoretical implication with US manufacturing industries, where the aggregate technology shocks are derived from a dynamic factor model. We find that aggregate technology shocks lead to an increase in the output growth of the sector, both directly and indirectly via its intersectoral linkages. More interestingly, we document a crucial role of the intersectoral network channel, which contributes about 50 percent of the total effect. In addition, the network-based effect comes mostly from downstream linkages of sectors, which is broadly consistent with theory. 

JEL Codes: E32, C67, C33, L16, D24.

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

This paper investigates the role of international trade in the increase in the employment share of non-tradable sectors (services and construction). Borrowing insights from the vast theoretical literature on the determinants of structural change, we build an empirical model allowing to distinguish between long-run and short-run effects. We use this model to investigate the relative importance of the main traditional demand-side and supply-side channels of structural change, assessing, in this context, the role of trade variables. To this end, we use an unbalanced panel of countries for the period 1960-2011 from the EU-KLEMS and the GGDC 10-sector databases. Our preliminary results suggest that both Engelian income effects, i.e. the so-called demand-side drivers, and relative productivity, i.e. the supply-side channel, are relevant drivers of structural change. We show that the import and export shares are positively and negatively related, respectively, with the employment shifts to non-tradable sectors in the long run, in particular, for mature and transition economies. In the short run, a positive and significant relationship between the import share and structural shifts towards tradable sectors emerges. 

JEL Codes: F1, F4, O1, O4.

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

This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy. 

JEL Codes: D63, E50, E52.

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

In this paper, we analyze the relationship between various risk factors and euro area government bond yield spreads, focusing particularly on the monetary policy stance. Our results show that credit and common risk factors are consistently priced in government bond yield spreads, while liquidity differentials are relevant especially during periods of stressed market conditions. We demonstrate that the liquidity component has been more prominent during periods of declining interest rates and increasing reserves, while it has diminished on announcement days of monetary policy decisions related to PSPP. Overall, the liquidity component has been statistically insignificant since the announcement of accommodative non-standard monetary policy measures.

JEL Codes: C23, E62, H50.

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

Online appendix (204.3 KB download icon)

The Great Recession has strongly influenced employment patterns across skill and gender groups. This paper analyzes how the resulting changes in non-employment have affected selection into jobs and hence gender wage gaps. Using data for the European Union, we show that male selection into the labour market, traditionally disregarded, has become positive. This is particularly so in Southern Europe, where dramatic drops in male unskilled employment have taken place during the crisis. As regards female selection, traditionally positive, we document two distinct effects. An added-worker effect has increased female labour force participation and hence reduced selection in some countries. In others, selection has become even more positive as a result of adverse labour demand shifts in industries which are intensive in temporary work, a type of contract in which women are over-represented. Overall, our results indicate that selection has become more important among men and less so among women, thus changing traditional gender patterns and calling for a systematic consideration of male non-employment when studying gender wage gaps.

JEL Codes: J31.

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

This study develops a symmetric two-country New-Keynesian general equilibrium model with endogenous growth, Calvo-style price and wage rigidities, and international trade of final consumption goods and intermediate goods. The equilibrium implications of two financial market structures are compared: financial autarky and complete markets. In the case of financial autarky, no international bond is traded. In the case of complete markets, the households have access to a full set of international nominal state-contingent bonds. We find that assuming complete markets instead of financial autarky leads to higher co-movement of most macroeconomic growth rates across countries, higher co-movement of inflation rates across countries, lower uncovered interest rate parity regression coefficients, and a lower correlation between exchange rate growth and consumption growth differentials. These results are mostly in line with US and UK data from 1950-2015, which are split into two samples, 1950-1970 and 1971-2015, in order to be compared to the model with financial autarky and the model with complete markets, respectively.

JEL Codes: E30, E44, F44, G12, O30.

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

We develop a consumption-savings model that distinguishes households’ perceived income uncertainty from income uncertainty as measured by an econometrician. Households receive signals on their future disposable income that can drive a gap between the two uncertainties. With an uncertainty gap that is consistent with direct estimates stemming from subjective income expectations, the model jointly explains three consumption inequality and insurance measures in US micro data that are not captured without the difference: (i) the cross-sectional variance of households’ consumption, (ii) the covariance of current consumption and income growth and (iii) the income-conditional mean of household consumption.

JEL Codes: E21, D31, D52.

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

Using the March Current Population Survey, I show that over the last two decades, married households in the United States received increasingly more public insurance against labor income risk, whereas the opposite was true for single households. To evaluate the welfare consequences of this trend, I perform a quantitative analysis. As a novel contribution, I expand the standard incomplete markets model à la Aiyagari (1994) to include two groups of households: married and single. The model allows for changes in the marital status of households and accounts for transition dynamics between steady states. I show that the divergent trends in public insurance have a significant detrimental effect on the welfare of both married and single households.

JEL Codes: D52, D60, E21, E62, H31.

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

The co-movement of US sovereign rates suggests a long-run common stochastic trend. Traditional cointegrated systems need to assume that interest rates are unit roots and thus imply non-stationary and non-mean-reverting dynamics. Based on recent econometric developments, we postulate and estimate a fractional cointegrated model (FCVAR) which allows for a mean-reverting stochastic trend. Our results point to the presence of such mean-reverting fractional cointegration among sovereign rates. The implied term premium is less volatile than the classic I(0) stationary and I(1) unit root models. Our analysis highlights the role of real factors (but not inflation) in shaping term premium dynamics. We further identify the dynamic effects of quantitative easing policies on our identified term premium. In contrast to the stationary-implied term premium, we find a significant term premium decline following these large-scale asset purchase programs.

JEL Codes: C2, C3, E4, G1.

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

Currency unions are often modeled as homogeneous economies, although they are fundamentally different. The expectations that impact macroeconomic behavior in any given country are not the expectations of variables at the currency-union level but at the country level. We model these expectations with a behavioral reinforcement learning model. In our model, economic integration is of particular importance in determining whether economic behavior in a currency union is stable. Monetary policy alone is insufficient to guarantee stable economic behavior, as the central bank cannot conduct different monetary policies in different countries. These results are easily overlooked when modeling expectations as rational.

JEL Codes: E03, F45, E52, D84.

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

Recent evidence suggests that credit booms and asset price bubbles may undermine economic growth even as they occur, regardless of whether a crisis follows, by crowding out investment in more productive, R&D-intensive industries. This paper incorporates Schumpeterian endogenous growth into a DSGE model with credit-constrained entrepreneurs to show how shocks affecting firms' access to credit can generate boom-bust cycles featuring large fluctuations in land prices, consumption, and investment. During the expansion, rising land prices tend to crowd out capital and (especially) R&D investment: in the long run, this results in lower productivity levels, which in turn implies lower levels of aggregate output and consumption. Moreover, higher initial loan-to-value ratios tend to be associated with larger macroeconomic fluctuations. A counter-cyclical LTV ratio targeting credit growth has relevant stabilization effects but brings about small gains in terms of long-run consumption levels, and thus of welfare.

JEL Codes: E22, E32, E44, O30, O40.

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

The international diffusion of technology plays a key role in stimulating global growth and explaining co-movements of international equity returns. Existing empirical evidence suggests that countries are heterogeneous in their attitude toward innovation: Some countries rely more on technology adoption while other countries rely more on internal technology production. European countries that rely more on adoption are also typically characterized by lower fiscal policy flexibility and higher labor market rigidity. We develop a two-country model, in which both countries rely on R&D and adoption, to study the shortand long-run effects of aggregate technology and adoption probability shocks on economic growth in the presence of the aforementioned asymmetries. Our framework suggests that an increase in the ability to adopt technology from abroad stimulates future economic growth in the country that benefits from higher adoption rates but the beneficial effects also spread to the foreign country. Moreover, it helps to explain the differences in macro quantities and equity returns observed in the international data.

JEL Codes: E3, F3, F4, G12.

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

We employ the recent Jordà et al. (2016) and Knoll et al. (2017) datasets to investigate the long-run relationship between house prices and credit volume, allowing for interest rate, real exchange rate and real gross domestic product (GDP). We refine the analysis using more recent data at the quarterly-level to define relevant co-integrating relationships across a number of European economies. Housing, GDP and credit cross-sectional averages are included in the analysis to detect potential spill-over effects. Empirical results indicate cross-country heterogeneities and an uneven feedback mechanism between credit and housing – the full loop is established only for several countries in the dataset. Important results relate to the statistical properties of the housing time series. Grouping countries for panel-like econometric exercises may lead to spurious regression results, poor inference and misleading policy implications. Short-run dynamics, compared to the long-run may often lead to contradicting policy advice if the order of integration of the house price series is not properly accounted for. Accounting for spatial patterns of house prices which cannot be attributed to global output shocks may provide useful insights into policy making.

JEL Codes: C21, E51, O18, R31.

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

We study the general equilibrium implications of different fiscal policies on macroeconomic quantities, asset prices, and welfare by utilizing two endogenous growth models. The expanding variety model features only homogeneous innovations by entrants. The Schumpeterian growth model features heterogeneous innovations: “incremental” innovations by incumbents and “radical” innovations by entrants. The government levies taxes on labor income and corporate profits and supplies subsidies to consumption, capital investment, and investments in research and development by entrants and, if applicable, incumbents. With these models at hand, we provide new insights on the interplay of innovation dynamics and fiscal policy.

JEL Codes: E22, G12, H20, I30, O30.

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

This paper considers a variety of reaction functions in the context of real time data to analyse U.K. monetary policy under inflation targeting adopted in 1992. In order to deal with lack of current and future data in real time, we construct the forecasts of expected variables in the first step and use the constructed data for the estimations of contemporaneous- and forward-looking rules. Moreover, we employ the impulse-indicator saturation method to deal with the issue of outliers and therefore obtain robust estimates of policy parameters. Our results show that the robust characteristics of monetary policy during the inflation targeting regime are forward-looking and raising the interest rate by more than one-to-one to movements in inflation, thereby satisfying the Taylor principle.

JEL Codes: C22, C52, C53, E52, E58.

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

Also published in the ECB Working Paper Series

We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

JEL Codes: F32, F31, C33.

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

Space is important. In this paper we use the global financial crisis as an exogenous shock to the German labor market to elucidate the spatial nexus between crime and unemployment. Our contribution is twofold: first, we lay down a parsimonious spatial labor market model with search frictions, criminal opportunities, and, unlike earlier analyses, productivity shocks which link criminal engagement with employment status. Second, we seek empirical support using data on the 402 German regions and years 2009 - 2010, in a setting that not only allows for crime spatial multipliers but also circumvents reverse causality by exploiting exogenous changes in unemployment due to the crisis. As predicted by our theory, the destruction of the lowest productivity matches, measured by increases in unemployment rates, has a significant impact on pure property crime (housing burglary and theft of/from motor vehicles) and street crime. The analysis offers important implications for local government policy.

JEL Codes: C31, J64, K42, R10.

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

Also published in the ECB Working Paper Series

In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identification based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer inflation in the euro area.

JEL Codes: E31, F3, F41.

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

Non-technical summary (23.7 KB download icon)

This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.

JEL Codes: C38, E31, F31.

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

Southern Europe is currently experiencing a double-whammy: high levels of government debt coupled with a rapidly aging population. Thus, the consolidation of (pension) budgets seems inevitable. In this paper we examine the short- and long-run macroeconomic effects of public old-age pension reforms and other fiscal policies under conditions of population aging. To do so, we calibrate OGRE, a New Keynesian model with overlapping generations, unemployment and an underground sector to match annual data on Portugal and Spain. Our main finding is that a retirement-age increase is the least harmful policy with respect to long-run output. However, we raise some doubts about the feasibility of implementing this policy.

JEL Codes: E24, E26, H55, J11, J46.

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

Also published in the Journal of Economic Dynamics and Control, Volume 78, Pages 118–148

This paper studies a two-country production economy with complete and frictionless financial markets and international trade in which competition in R&D leads to endogenous new firm creation and economic growth. Current monopolists (“incumbents”) and potential new firms (“entrants”) compete in developing patents domestically. These innovative firms use both consumption goods in their R&D technologies to capture international technological spillovers. In the model specifi- cations with technology spillover one obtains that (i) the cross-country correlation of consumption growth is lower than the one of output growth; (ii) net exports are negatively correlated with output; (iii) the model matches the high co-movement of stock returns across countries. Furthermore, heterogeneity in the R&D technology bundle home bias parameters for incumbents and entrants enables the model to replicate the empirically rather moderate correlation between the R&D innovation probabilities of incumbents and entrants within a country. Moreover, the model produces a positive value premium. Finally, the exchange rate volatility is decreasing in the amount of technology spillovers.

JEL Codes: E22, F31, G12, O30, O41.

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

In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency.
We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments.
In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.

JEL Codes: F31, F43, C23.

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

Based on survey data covering 6,429 firms in 10 Central and Eastern European countries we examine the impact of the banking sector environment, as well as the institutional and regulatory environment, on credit constrained firms. We find that small and foreign-owned firms are less likely to demand credit compared to audited and innovative firms. On the other hand, small, medium, publicly listed, sole proprietorship and foreign-owned firms had a higher probability of being credit constrained in 2008-2009 than in 2012-2014. The banking sector's environment analysis reveals that firms operating in more concentrated banking markets are less likely to be credit constrained. However, higher capital requirements, increased levels of loan loss reserves and a higher presence of foreign banks have a negative impact on the availability of bank credit. The evaluation of the institutional and regulatory environment in which firms operate shows that credit information sharing is negatively correlated with access to credit. Furthermore, we show that banking sector contestability can mitigate this negative effect. Finally, we find that in a better credit information sharing environment, foreign banks are more likely to provide credit.

JEL Codes: E51, G21, F34, L10.

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

Appendix (6.9 MB download icon)

Recent turbulent times have once again demonstrated how important flexible product and labour markets are to dampen the effects of adverse economic shocks. A number of labour market reforms have been implemented to enhance economic resilience and flexibility. However, accounting for the efficacy of policy interventions requires going beyond national boundaries and evaluating international interactions and global interdependencies, which may strengthen or weaken economic responses. Concentrating on open European economies, this paper deals with labour market institutions and structural reforms in a general equilibrium framework, which allows to analyse the intricate connections between labour policy choices and international trade (openness), paying special attention to labour market policy shocks. Amid discussions about a fiscal union in Europe, we empirically demonstrate that labour market policies can have positive and negative spillovers to trading partners, thereby calling for coordinated policies within a trading bloc. We answer three types of questions: what would have happened had all economies implemented structural labour market reforms simultaneously? How heterogeneous are responses in a single economy to shocks conducted in every other country? Relatedly, how heterogeneous are responses by all economies to a reform in one given economy?

JEL Codes: C32, C33, E24, F12, F16.

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

The trade-off between bank competition and financial stability has always been a widely and controversial issue, both among policymakers and academics. This paper empirically re-investigates the relationship between competition and bank risk across a sample of 54 European listed banks over the period 2004-2013. However, in contrast to most extant literature, we consider both individual and systemic dimension of risk. Bank-individual risk is measured by the Z-score and the distance-to-default, while we consider the SRISK as a proxy for bank systemic risk. Using the Lerner index as an inverse measure of competition and after controlling for a variety of bank-specific and macroeconomic factors, our results suggest that competition encourages bank risk-taking and then increases individual bank fragility. This result is in line with the traditional “competition-fragility” view. Our most important findings concern the relationship between competition and systemic risk. Indeed, contrary to our previous results, we find that competition enhances financial stability by decreasing systemic risk. This result can be explained by the fact that weak competition tends to increase the correlation in the risk-taking behavior of banks.

JEL Codes: G21, G28, G32, L51.

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

Exchange rate assessment is becoming increasingly relevant for economic surveillance in the European Union (EU). The persistence of different wage, price and productivity dynamics among the Economic and Monetary Union (EMU) countries or EU members with a fixed exchange regime with the euro, coupled with the impossibility of correcting competitiveness differentials via the adjustment of nominal rates, have resulted in divergent dynamics in Real Effective Exchange Rates. This paper explores the role of economic fundamentals, included in the transfer effect theory, in explaining medium/long-run movements in the Real Effective Exchange Rates in the EU over the period 1994–2012 by using heterogeneous, co-integrated panel frameworks in static and dynamic terms. In addition, the paper provides an analysis of the misalignments of the rate for each member state based on the “equilibrium” measure calculated from the permanent component of the fundamentals (the so-called Behavioural Effective Exchange Rate).
We find that the coefficients of the determinants are extremely different across groups in magnitude and sometimes in sign as well and the transfer theory does not hold for periphery and the Central and Eastern European countries (CEECs). The relative importance of the transfer variable and the Balassa-Samuelson measure are crucial for the asymmetries. The resulting misalignments in EU28 are huge and the patterns diverge significantly across groups. The core countries have been undervalued for almost the whole period, which entails from an important increase in competitiveness for those countries. Instead the periphery has experienced high rates, especially in Portugal. In addition, the behaviour of CEECs is also driven, as expected, by the catching-up process and the criteria to the accession to the EU. The misalignments in this case are still extremely wide and reflect these phenomena.

JEL Codes: F31, C23.

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

This paper presents preliminary estimates of the euro area flexible-price output gap using the estimated version of the New Area-Wide Model (NAWM) – a large-scale DSGE model of the euro area developed and maintained by ECB staff. Following a definition of the flexible-price output gap frequently used in the literature, we show that the NAWM-based measure may at times differ quite considerably from more traditional output gap measures and may display fluctuations of larger amplitude. The dynamics of flexible-price output is mainly driven by shocks to technology, whereas fluctuations in the output gap can be attributed equally to supply and demand shocks. We analyse how robust this output gap estimate is with respect to new incoming data and compare it’s inflation forecast performance with alternative measures.

JEL Codes: C11, C32, E31, E32.

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