2020
This paper studies the effects of low and negative interest rates in the euro area on a wide range of macroeconomic and financial variables and documents the changes in the monetary transmission mechanism once the policy rate reaches the zero lower bound (ZLB). To that end, we employ a set of non-linear time series frameworks, namely a time-varying parameter structural vector autoregression with stochastic volatility and non-linear local projections and perform identification via both sign restrictions and high frequency information approaches. Our findings suggest that the policy rate has continued to support the aggregate demand in the euro area even in sub-zero territory. Despite that, we find that the reaction of inflation and its expectations has significantly deteriorated in the post-ZLB period. Regarding the transmission mechanism, we show that policy rate cuts below zero have a more persistent impact on the term structure and interest rate expectations. In addition to that, our results suggest that negative interest rates do not cause a contraction in lending despite the disconnect of lending rates from the policy rate. In general, our findings contribute to the growing list of literature which questions the empirical relevance of the ZLB. Keywords: NIRP, ZLB, monetary policy, euro area, non-linearities JEL code: C54, E43, E52, E58 We develop a fiscal DSGE model tailored to Latvia, a small open economy in a monetary union, for the purposes of policy simulation and scenario analysis. The fiscal sector elements comprise government investment, government consumption, government transfers that are asymmetrically directed to both optimizing and hand-to-mouth households, cyclical unemployment benefits, foreign ownership of government debt, import content in public consumption and investment, and fiscal rules for each fiscal instrument. The model features a search-and-matching labour market friction with pro-cyclical labour costs, a financial accelerator mechanism, and import content in final goods. We estimate the model using Latvian data, study the new channels in the model, and provide a comprehensive analysis on the macroeconomic effects of the fiscal elements. A particular finding is that having foreign-owned government debt generally breaks the Ricardian equivalence paradigm. Keywords: small open economy, fiscal policy, fiscal rules, Bayesian estimation JEL code: E0, E2, E3, F4, H2, H3, H6 This study investigates the impact of national fiscal rules on public investment policy. Using data of 35 OECD countries for the period 1995–2015, the paper provides evidence of a negative effect of expenditure rules on the level and share of government investment expenditure in total outlays, particularly in economic affairs. The effect of budget balance rules is less certain and seems to stem from those rules that do not explicitly exclude investment from the assessment. The coefficient estimates however imply a relatively low magnitude of the negative effect of fiscal rules. Overall, our paper suggests that, while loosening fiscal rules will not solve the problem of underinvestment, properly designed rules can help to protect public capital stock to some extent only. Keywords: fiscal rules, government expenditure, public investment, panel analysis JEL code: E62, H50, C23 We observe differences in the net wealth distribution by age among European countries. The net wealth distribution in Western EU countries is consistent with the life cycle hypothesis. However, in Eastern EU countries, the wealth distribution is skewed towards younger ages. The aim of the paper is twofold: first, we study the characteristics of economies leading to differences in the net wealth distribution by age; second, we evaluate the impact of these differences on the transmission of monetary policy. To do so, we develop a modified New Keynesian model where the demand side is represented by a multi-period overlapping generation setup, and the supply side of the economy follows the New Keynesian framework. The model is used to analyse the interaction between monetary policy and wealth accumulation originated by demographics and the productivity gap among generations in a coherent general equilibrium model. The HFCS database is used to calibrate the model for two groups of European countries. We find that the shape of net wealth distribution by age has an important bearing on the effectiveness and hence conduct of monetary policy. Keywords: overlapping generations model, New Keynesian model, wealth distribution, monetary policy JEL code: E32, E52, J11 This paper re-examines the findings of Stock and Watson (2012b) who assessed the predictive performance of DFMs over AR benchmarks for hundreds of target variables by focusing on possible business cycle performance asymmetries in the spirit of Chauvet and Potter (2013) and Siliverstovs (2017a; 2017b; 2020). Our forecasting experiment is based on a novel big macroeconomic dataset (FRED-QD) comprising over 200 quarterly indicators for almost 60 years (1960–2018; see, e.g. McCracken and Ng (2019b)). Our results are consistent with this nascent state-dependent evaluation literature and generalize their relevance to a large number of indicators. We document systematic model performance differences across business cycles (longitudinal) as well as variable groups (cross-sectional). While the absolute size of prediction errors tend to be larger in busts than in booms for both DFMs and ARs, DFMs relative improvement over ARs is typically large and statistically significant during recessions but not during expansions (see, e.g. Chauvet and Potter (2013)). Our findings further suggest that the widespread practice of relying on full sample forecast evaluation metrics may not be ideal, i.e. for at least two thirds of all 216 macroeconomic indicators full sample rRMSFEs systematically over-estimate performance in expansionary subsamples and under-estimate it in recessionary subsamples (see, e.g. Siliverstovs (2017a; 2020)). These findings are robust to several alternative specifications and have high practical relevance for both consumers and producers of model-based economic forecasts. Keywords: forecast evaluation, dynamic factor models, business cycle asymmetries, big macroeconomic datasets, US JEL code: C32, C45, C52, E17 This paper develops a Short-Term Inflation Projections (STIP) model, which captures cointegrated relationships between highly disaggregated consumer prices and their determinants. We document a significant pass-through of domestic labour costs, crude oil and global food commodity prices to consumer prices in Latvia. We also assess the model's forecast accuracy of Latvia's inflation during 2014–2018 and find that the STIP model statistically significantly outperforms a naïve benchmark model in real time. Keywords: inflation forecasting, autoregressive distributed lag model, pass-through, oil prices, food commodity prices, labour costs JEL code: C32, C51, C52, C53, E31Andrejs Zlobins
Abstract
Ginters Bušs, Patrick Grüning
Abstract
Oļegs Tkačevs
Abstract
Ludmila Fadejeva, Zeynep Kantur
Abstract
Boriss Siliverstovs, Daniel S. Wochner
Abstract
Andrejs Bessonovs, Oļegs Krasnopjorovs
Abstract
2019
In the conventional perturbation approach for solving DSGE models, the dynamics of the deviation of solutions from the steady state after a shock hitting an economy represents an impulse response function (IRF). A method to construct the IRF as a deviation from a deterministic global solution is proposed. The approach detects asymmetric reactions of an economy to shocks in different initial conditions. For example, in an economic downturn a negative shock might affect the economy more severely than in normal economic conditions. The method allows for constructing the IRF for highly nonlinear DSGE models. Keywords: DSGE, perturbation, global solution, trend inflation JEL code: C62, D58, D84 This paper empirically evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) on the euro area economy and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (SVARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG (Odyssean since July 2013, Delphic prior to that). The FG shock is identified via both traditional sign and zero restrictions of Arias et al. (2014) and narrative sign restrictions of Antolin-Diaz and Rubio-Ramírez (2018) which allow us to incorporate additional information about the timing of the shock to sharpen the inference. We find that the ECB's FG on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09%–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the expanded asset purchase programme (APP) in 2015 considerably enhanced the FG credibility. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms. Keywords: forward guidance, central bank communication, unconventional monetary policy, euro area, structural VAR JEL code: C54, E32, E52, E58 This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) expanded asset purchase programme (APP) on Latvia and other euro area countries and investigates the cross-border transmission mechanism. To that end, we employ two different vector autoregressive (VAR) models often used to evaluate the spillovers stemming from the monetary policy actions, namely a bilateral structural VAR with block exogeneity (BSVAR-BE) and a multi-country mixed cross-section global VAR with stochastic volatility (MCS-BGVAR-SV), both estimated using Bayesian techniques. We find that the APP had a limited and weakly significant impact on Latvia's output and that most of the effect was generated by spillovers from other countries. However, we provide evidence that the APP had a robust impact on Latvian inflation due to depreciation of the euro. Regarding other jurisdictions, our results suggest that the ECB's asset purchases had a larger impact on industrial production in the countries where the portfolio rebalancing channel was activated. Despite that, our evidence suggests that the APP was mainly transmitted to inflation via exchange rate depreciation rather than through aggregate demand-driven shifts in the Phillips curve. Keywords: expanded asset purchase programme, quantitative easing, euro area, GVAR, SVAR, Bayesian estimation JEL code: C54, E47, E58, F42 In this paper we reassess the forecasting performance of the Bayesian mixed-frequency model suggested in Carriero et al. (2015) in terms of point and density forecasts of the GDP growth rate using US macroeconomic data. Following Chauvet and Potter (2013), we evaluate the forecasting accuracy of the model relative to a univariate AR(2) model separately for expansions and recessions, as defined by the NBER business cycle chronology, rather than relying on a comparison of forecast accuracy over the whole forecast sample spanning from the first quarter of 1985 to the third quarter of 2011. We find that most of the evidence favouring the more sophisticated model over the simple benchmark model is due to relatively few observations during recessions, especially those during the Great Recession. In contrast, during expansions the gains in forecasting accuracy over the benchmark model are at best very modest. This implies that the relative forecasting performance of the models varies with business cycle phases. Ignoring this fact results in a distorted picture: the relative performance of the more sophisticated model in comparison with the naive benchmark model tends to be overstated during expansions and understated during recessions. Keywords: nowcasting, mixed-frequency data, real-time data, business cycle JEL code: C22, C53Viktors Ajevskis
Abstract
Andrejs Zlobins
Abstract
Andrejs Zlobins
Abstract
Boriss Siliverstovs
Abstract
2018
Utilising data of the EU28 Member States for the period 1996–2015, this paper confirms the findings of previous studies that the stipulation of fiscal rules reduces fiscal volatility and consequently contributes to macroeconomic stability. Yet, we document that this result only holds for rules which are designed to be unaffected by the current state of the business cycle, i.e. which are "a-cyclical". Those can, e.g. be budget balance rules that set ceilings in cyclically adjusted terms or expenditure rules that set a limit relative to potential instead of current output. Furthermore, the stringency of fiscal rules amplifies their stabilising effect. Actual year-to-year compliance with fiscal rules seems to play no systematic role, such that effects of the rules can be observed even if they are not complied with year-to-year. Overall, our paper suggests that strong, properly designed numerical rules act as an anchor for fiscal policy makers and contribute to more stable discretionary fiscal policy. Keywords: fiscal rules, fiscal policy volatility, panel data, compliance JEL codes: C23, E62, E32, H60 This paper investigates the international effects of a euro area monetary policy shock, focusing on countries from Central, Eastern, and Southeastern Europe (CESEE). To that end, we use a global vector autoregressive (GVAR) model and employ shadow rates as a proxy for the monetary policy stance during normal and zero-lower-bound periods. We propose a new way of modelling euro area countries in a multi-country framework, accounting for joint monetary policy, and a novel approach to simultaneously identifying shocks. Our results show that in most euro area and CESEE countries prices adjust and output falls in response to a euro area monetary tightening, but with a substantial degree of heterogeneity. Keywords: euro area monetary policy, global vector autoregression, spillovers This paper investigates the effect of export entry on productivity, employment and wages of Latvian and Estonian firms in the context of global value chains (GVCs). Like in many countries, exporting firms in Latvia and Estonia are more productive, larger, pay higher wages and are more capital-intensive than non-exporting firms. While this is partly because firms that are originally more productive and have better performances are more likely to enter exports, Latvian and Estonian firms also realise more than 23% and 14% higher labour productivity level respectively as the result of export entry. Export entry also increases employment and average wages. Gains in productivity and employment are particularly large when firms enter exports that are related to participation in knowledge-intensive activities found in the upstream of GVCs. For instance, Latvian firms that start exporting intermediate goods or non-transport services (which include knowledge-intensive services) enjoy significantly higher productivity gains than those starting to export final goods or transport services. These findings underscore the importance of innovation policies that strengthen firms' capabilities to supply highly differentiated knowledge-intensive goods and services to GVCs. Keywords: productivity, global value chain, exports, Latvia, Estonia The study proposes an estimation method of the natural rate of interest based on the shadow rate term structure of interest rates model and using information from nominal yields data. For the purpose of comparison and robustness check, different samples for the estimation of the natural rate of interest – three for the euro area and two for the US – are considered. The estimates based on all considered samples show a downturn trend in the estimated natural rates of interest for the euro area. However, since the beginning of 2013, this downward trend has levelled off. Compared to the results obtained by affine models, the shadow rate model produces lower estimates of natural rates of interest. From the beginning of 2013, the dynamics of estimated series of the US natural rate of interest closely follows the series produced by Laubach–Williams. However, before that the series are more divergent. In order to demonstrate the use of the natural rate of interest, we employ the estimated series of the natural rate of interest in the balance-approach version of the Taylor rule. The results imply that, at the end of the sample in July 2017, Taylor rule-suggested policy rates were in line with the actual ECB policy rates. Keywords: natural rate of interest, term structure of interest rates, lower bound, non-linear Kalman filter This paper investigates the effects of EU regional support on firms' productivity, the number of employees and other firm performance indicators. For this purpose, a rich firm-level dataset for Latvia, a country where investment activities are affected by the availability of EU funding, is used. The paper finds that participation in activities co-funded by the ERDF raises firms' input and output soon after they embark on them, while the effect on labour productivity and TFP appears only with a time lag of three years. However, this positive productivity premium is not homogenous across firms and is more likely to materialise in the case of initially less productive and medium-sized/large firms. Furthermore, statistical significance of positive productivity gains is not particularly robust across different estimation procedures. The study also shows that after controlling for investment expenditures, EU sponsored projects are as efficient as the privately financed ones, irrespective of where private financing comes from. Keywords: EU funds, productivity, firm-level data, propensity score matching Wolf Heinrich Reuter, Oļegs Tkačevs, Kārlis Vilerts
Abstract
Soňa Benecká, Ludmila Fadejeva, Martin Feldkircher
Abstract
JEL codes: C32, F44, E32, O54
3/2018 Exports and productivity in global value chains: comparative evidence from Latvia and Estonia
Konstantīns Beņkovskis, Jaan Masso, Oļegs Tkačevs, Priit Vahter, Naomitsu Yashiro
Abstract
JEL codes: F12, F14, O19, O57Viktors Ajevskis
Abstract
JEL codes: C24, C32, E43, E58, G12Konstantīns Beņkovskis, Oļegs Tkačevs, Naomitsu Yashiro
Abstract
JEL codes: C14, D22, R11
2017
Katalin Bodnár, Ludmila Fadejeva, Stefania Iordache, Liina Malk, Desislava Paskaleva, Jurga Pesliakaitė, Nataša Todorović Jemec, Peter Tóth, Robert Wyszyński We study the transmission channels for rises in the minimum wage using a unique firm-level dataset from eight Central and Eastern European countries. Representative samples of firms in each country were asked to evaluate the relevance of a wide range of adjustment channels following specific instances of rises in the minimum wage during the recent post-crisis period. The paper adds to the rest of literature by presenting the reactions of firms as a combination of strategies, and evaluates the relative importance of those strategies. Our findings suggest that the most popular adjustment channels are cuts in non-labour costs, rises in product prices, and improvements in productivity. Cuts in employment is less popular and occurs mostly through reduced hiring rather than direct layoffs. Our study also provides evidence of potential spillover effects that rises in the minimum wage can have on firms without minimum wage workers. Keywords: minimum wage, adjustment channels, firm-level survey This paper aims at identifying the school characteristics consistently associated with better performance of pupils on state exams. First, we find that exam scores are positively related to school size (the number of pupils in the respective school) and teacher salaries, but negatively – with teacher age. Meanwhile, quantitative inputs like the number of teachers and computers per pupil are not robust determinants of education performance. Second, we show that pupils in urban and rural schools would perform similarly if characteristics of these schools were the same. The Oaxaca–Ransom decomposition fully explains the urban-rural exam score gap by a greater number of pupils and higher teacher salaries in urban schools as well as by different pupil structure; in turn, pupils' ethnic origin plays in favour of rural schools. Finally, Stochastic Frontier Analysis models show that school size is a robust efficiency determinant, while school location in the Riga region or in another big city is not. The bottom line is that structural reforms involving school mergers and a rise in teacher salaries might bring non-negligible dividends in terms of education quality. Keywords: education performance, school size, rural schools, Oaxaca–Ransom decomposition, Stochastic Frontier Analysis Konstantīns Beņkovskis (Latvijas Banka and Stockholm School of Economics in Riga), Benjamin Bluhm (Goethe Universität Frankfurt and ADVISORI FTC GmbH), Elena Bobeica (European Central Bank), Chiara Osbat (European Central Bank), Stefan Zeugner (European Commission) What drives external performance of countries? This is a recurring question in academia and policy. The factors underlying export growth are receiving great attention, as countries struggle to grow out of the crisis by increasing exports and as protectionist discourses take foot again. Despite decades of debates, it is still unclear what the drivers of external performance are and, importantly, which ones policy makers can influence. We use Bayesian Model Averaging in a panel setting to investigate the drivers of export market shares of 25 EU countries, considering a wide range of traditional indicators along with novel ones developed within the CompNet. We find that export market share growth is linked to different factors in the old and new EU Member States, with one exception: for both groups, competitive pressures from China have strongly affected export performance since the early 2000s. In the case of the old EU Member States, investment, the quality of institutions and liquidity available to firms also appear to play a role. For the new EU Member States, labour and total factor productivity are particularly important, while inward FDI matters more than domestic investment. Price competitiveness does not seem to play a very important role in either set of countries: relative export prices do show correlation with export performance for the new EU Member States, but only when they are adjusted for quality. Our results point to the importance of considering the "exporting stage" of a country when discussing export-enhancing policies. Keywords: export shares, competitiveness, Bayesian Model Averaging This paper integrates the alternating-offer wage bargaining (AOB) in a fully-fledged New Keynesian open economy model, and estimates it to the Latvian data. Further on, the paper studies the model's properties and compares them to alternative specifications for labour market modelling, i.e. the Nash wage bargaining with both Taylor-type wage rigidity and without exogenously imposed wage inertia, a reduced-form sharing rule, and a reduced-form wage rule. The goal of the paper is to choose a labour market modelling specification that suits best the needs of the central bank of Latvia in terms of macroeconomic modelling and forecasting. The results indicate that the AOB model suits the Latvian labour market well. The paper concludes with a simulation of economic effects from a permanent increase in the minimum-to-average wage ratio, as observed in Latvia, and finds potentially large losses of employment and output. Keywords: alternating-offer bargaining, DSGE model, forecasting, minimum wageAbstract
JEL codes: D22, E23, J31Oļegs Krasnopjorovs
Abstract
JEL codes: I21, C1Abstract
JEL codes: C23, C51, C55, F14, O52Ginters Bušs
Abstract
JEL codes: E0, E2, E3, F4
2016
This paper studies the impact of sovereign bond yields on fiscal discipline against the background of unprecedentedly low interest rates in advanced economies brought about by ultra-expansionary monetary policies of recent years. By employing the panel data econometric approach for a sample of OECD, EU and euro area countries over the period 1980–2014, the study suggests a positive and statistically significant impact of long-term sovereign bond yields on primary balances (PBs), indicating that a decrease in borrowing costs leads to a statistically significant deterioration of fiscal balances. The findings herein also suggest that falling bond yields pass on to fiscal balances through increases in government expenditure rather than revenue reduction. From the economic policy perspective, these findings imply that monetary policy measures resulting in ultra-low interest rates may cause negative side effects for fiscal discipline. Keywords: fiscal policy, fiscal reaction function, sovereign bond yields, panel data This paper studies the importance of price and cost competitiveness for intra- and extra-euro area trade flows of euro area countries. A standard error correction framework shows that price competitiveness is a relatively more important driver of trade flows outside the euro area as compared to those within the monetary union, especially for exports, that tend to be more sensitive to relative prices than imports. We consider various measures of competitiveness and conclude that it is difficult to single out one that outperforms the others. Using an encompassing test, measures based on labour costs appear to contain relatively more information for trade flows, particularly for exports outside the euro area. Keywords: price and cost competitiveness, intra- and extra-euro area trade, error correction model This paper studies the relationship between inflation and economic slack in Latvia with a particular focus on its time variation. The results suggest that the Phillips curve for Latvia had been steepening before the crisis against the backdrop of rising inflation. In the more recent years, there has been tentative evidence of the Phillips curve flattening as Latvia's economy entered a period of very low inflation. If the current trend of an even weaker response of inflation to economic activity in Latvia persists and proves to be statistically significant, unconventional monetary policy instruments may be of limited effectiveness to control inflation in Latvia. This calls for structural reforms aimed at increasing competition and reducing price stickiness. Keywords: inflation, Phillips curve, business cycles, Bayesian estimation This paper proposes a ZLB/shadow rate term structure of interest rates model with both unobservable factors and those of non-standard monetary policy measures. The non-standard factors include the ECB's holdings of APP and LTROs as well as their weighted average maturities. The model is approximated by the Taylor series expansion and estimated by the extended Kalman filter, using the sample from July 2009 to September 2015. The results show that the 5-year OIS rate at the end of September 2015 was about 60 basis points lower than it would have been in the case of the absence of the non-standard monetary policy measures. Keywords: term structure of interest rates, lower bound, non-linear Kalman filter, non-standard monetary policy measures This paper describes the first CGE model for Latvia that consists of 32 industries, 55 products and seven categories of final users. To construct the model we use Latvia's National Supply and Use tables for 2011 from the WIOD database. Special attention is devoted to the fiscal block: the model consists of five government expenditure types and five revenue sources, including such four major taxes as the personal income tax (PIT), state social insurance mandatory contributions (SSIMC), value added tax (VAT) and excise tax. We also introduce an endogenous shadow economy, the size of which depends on the level of tax rates and economic activity. These features of the model allow us to obtain rich and detailed conclusions about the effect of several fiscal measures on Latvia's economy, both in aggregate and by sector. Keywords: CGE model, Latvia, fiscal policyOļegs Tkačevs, Kārlis Vilerts
Abstract
JEL codes: E62, H62Elena Bobeica, Styliani Christodoulopoulou, Oļegs Tkačevs
Abstract
The key policy implication is that, in order to adjust competitiveness disequilibria within the monetary union, measures, such as structural policies fostering non-price competitiveness should be pursued in the deficit countries besides those aimed at price and cost adjustments.
JEL codes: F14, F15, F41Andrejs Bessonovs, Oļegs Tkačevs
Abstract
JEL codes: C32, C51, E31, E52Viktors Ajevskis
Abstract
JEL codes: C24, C32, E43, E58, G12Konstantīns Beņkovskis, Eduards Goluzins, Oļegs Tkačevs
Abstract
JEL codes: D58, C68, H2, H6