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All results 48
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No 48. Claudio Battiati. R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles
2017-12-11
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No 47. Giuliano Curatola, Michael Donadelli, Patrick Grüning. Technology trade with asymmetric tax regimes and heterogeneous labor markets: Implications for macro quantities and asset prices
2017-10-05
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No 46. Claudio Cesaroni. Optimal long-run inflation and the informal economy
2017-09-20
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No 45. Mihnea Constantinescu, Povilas Lastauskas. The knotty interplay between credit and housing
2017-06-23
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No 44. Eglė Jakučionytė. Personal bankruptcy, bank portfolio choice and the macroeconomy
2017-04-24
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No 43. Michael Donadelli, Patrick Grüning. Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare
2017-04-03
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No 42. Cars Hommes, Domenico Massaro, Matthias Weber. Monetary policy under behavioral expectations: Theory and experiment
2017-03-30
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No 41. Anh Dinh Minh Nguyen. U.K. monetary policy under inflation targeting
2017-03-02
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No 40. Mariarosaria Comunale. A panel VAR analysis of macro-financial imbalances in the EU
2017-02-28
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No 39. Povilas Lastauskas, Eirini Tatsi. Spatial nexus in crime and unemployement in times of crisis
2017-02-02
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No 38. Mariarosaria Comunale, Davor Kunovac. Exchange rate pass-through in the Euro Area
2017-01-27
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No 37. Juliana Araujo, Povilas Lastauskas, Chris Papageorgiou. Evolution of bilateral capital flows to developing countries at intensive and extensive margins
2016-12-01
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No 48. Claudio Battiati. R&D, growth, and macroprudential policy in an economy undergoing boom-bust cycles

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.

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No 47. Giuliano Curatola, Michael Donadelli, Patrick Grüning. Technology trade with asymmetric tax regimes and heterogeneous labor markets: Implications for macro quantities and asset prices

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.

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No 46. Claudio Cesaroni. Optimal long-run inflation and the informal economy

This paper studies the optimal long-run rate of inflation in a two-sector model of the Lithuanian economy with informal production and price rigidity in the regular sector. The government issues no debt and is committed to follow a balanced budget rule. The informal sector is unregulated and untaxed and its existence limits the government’s ability to collect revenues through fiscal policy. Such environment provides therefore the basis for quantifying the possible existence of a public finance motive for inflation. The main results can be summarized as follows: First, there is a strong heterogeneity in the optimal inflation rate which depends on the tax rate that is endogenously adjusted to keep the budget balanced. Inflation can be as high as 6.77% when the capital tax rate is endogenous, but when labor income taxes are adjusted optimal policy calls for a rate of deflation such that the nominal interest rate hits the zero lower bound. Second, the optimal inflation rate is a non-decreasing function of the size of the informal economy and, in most cases, there is a positive relationship between the two. Finally, substantial deviations from zero inflation are observed even in presence of a plausible degree of price rigidity.

JEL Codes: E26, E52, H26.

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

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No 45. Mihnea Constantinescu, Povilas Lastauskas. The knotty interplay between credit and housing

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.

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No 44. Eglė Jakučionytė. Personal bankruptcy, bank portfolio choice and the macroeconomy

This paper explores the spillover effects from increasing personal bankruptcy protection. Innovatively, the paper shows that the spillover effects can be influenced by the bank portfolio choice. Since a low level of personal bankruptcy protection keeps an insolvent individual liable until her debt is repaid in full, lender’s returns on mortgages are less uncertain than returns on other assets ceteris paribus. Risk-averse banks would prefer mortgages over other types of assets such as corporate loans. Corporate lending and thus equilibrium output would fall. In contrary to the popular view that creditor protection smooths credit provision and makes the allocation of resources more efficient, I show that in some cases a low level of personal bankruptcy protection can lead to aggregate consumption losses. Also I show that macroprudential policies (LTV ratios) can successfully complement higher personal bankruptcy protection in ensuring even higher welfare.

JEL Codes: E44, G11, G21, K35, R21.

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

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No 43. Michael Donadelli, Patrick Grüning. Innovation dynamics and fiscal policy: Implications for growth, asset prices, and welfare

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.

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No 42. Cars Hommes, Domenico Massaro, Matthias Weber. Monetary policy under behavioral expectations: Theory and experiment

Expectations play a crucial role in modern macroeconomic models. We consider a New Keynesian framework under rational expectations and under a behavioral model of expectation formation. We show how the economy behaves in the alternative scenarios with a focus on inflation volatility. Contrary to the rational model, the behavioral model predicts that inflation volatility can be lowered if the central bank reacts to the output gap in addition to inflation. We test the opposing theoretical predictions in a learning-to-forecast experiment. The results support the behavioral model and the claim that output stabilization can lead to less volatile inflation.

JEL Codes: C90, E03, E52, D84.

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

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No 41. Anh Dinh Minh Nguyen. U.K. monetary policy under inflation targeting

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.

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No 40. Mariarosaria Comunale. A panel VAR analysis of macro-financial imbalances in the EU

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.

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No 39. Povilas Lastauskas, Eirini Tatsi. Spatial nexus in crime and unemployement in times of crisis

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.

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No 38. Mariarosaria Comunale, Davor Kunovac. Exchange rate pass-through in the Euro Area

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.

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No 37. Juliana Araujo, Povilas Lastauskas, Chris Papageorgiou. Evolution of bilateral capital flows to developing countries at intensive and extensive margins

Online appendix (727.1 KB )


Motivated by the rise in capital flows to low-income countries (LICs), we examine the nature of these flows and the factors affecting foreign investors’ decision. Recognizing the presence of fixed investment costs, we analyze capital flows at both intensive and extensive margins. To fix ideas, we resort to the gravity literature for the estimating relationships which we embed into a two-tier econometric framework with cross-sectional dependence. Our main finding is that market entry costs are statistically and economically very detrimental to LICs. We also obtain the gravity-type relationship for the destination income unconditionally but not after conditioning on relevant variables, as well as establish labor productivity as a robust attractor of capital inflows.

JEL Codes: C33, C34, F21, F62, O16.

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

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