< research
 
when we try to pick out anything by itself, we find it hitched to everything else in the universe. /John Muir/


Research: International and macro-labour economics. Spillovers. Structural reforms, international economic policy and econometrics of policy evaluation (panel data and time series). Global economy and (de)globalisation

MAIN PUBLICATIONS

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Abstract

 

Labor Market Reforms and the Role of the Monetary Policy Environment (with J. Stakėnas)

10.1016/j.euroecorev.2020.103509

 

European Economic Review, Vol 128, Sep 2020, 103509

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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? The answer to this question is a firm, yes. We document the vital role of accommodative monetary policy for an increase in unemployment benefits, spending on active labor market policies, and labor market deregulation to boost growth and reduce unemployment. It was found that if interest rates cannot be reduced, then unemployment benefits should be lowered. A more rigid labor market, it was further found, can deliver expansionary effects, especially during the crisis period.
 Labour Market Institutions in Open EconomySectoral Reallocations, Aggregate Adjustments, and Spillovers (with J. Stakėnas)
https://doi.org/10.1111/roie.12472
 Bank of Lithuania Working Paper Series No 332016

Review of International Economics, Vol. 28, Issue 3, Aug 2020, p. 814-845

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 We introduce frictional unemployment in a multiworker heterogeneous firm model with a dynamic matching process, one‐ and two‐sector equilibria, and international markets. A change in labour market policies transforms the share of exporters and affects average productivity. The closure of equilibrium with or without sectoral arbitrage plays an important role in generating macro‐level outcomes for employment subsidies. Unemployment benefits, on the other hand, make unemployment and openness rise, independently of sectoral reallocations. We also find that simultaneous implementation of labour market policies remove potential gain in the trade share, and, when it comes to unemployment benefits, may even be detrimental.
 Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins, PDF (with C. Papageorgiou and J. D. Araujo)    
https://doi.org/10.1111/jmcb.12423
  Bank of Lithuania Working Paper Series No 37, 2016

Journal of Money, Credit and BankingVol 49, Issue 7, Oct 2017, p. 1517–1554

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Data and codes
 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. 
 
 POLICY-FOCUCED PUBLICATIONS

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Supplementary Materials

 

Abstract

 Knotty Interplay Between Credit and HousingBank of Lithuania, 2017 (with M. Constantinescu) 
https://doi.org/10.1016/j.qref.2018.05.013

 Bank of Lithuania Working Paper Series No 452017 
The Quarterly Review of Economics and Finance, Vol 70, Nov 2018, p. 241-266 

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 Featured on CentralBanking.comCodes  We employ the recent Jordà, Schularick, and Taylor (2016) and Knoll, Schularick, and Steger (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 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 the effects of common factors. Empirical results indicate the presence of cross-country heterogeneities and an uneven feedback mechanism between credit and housing – the full loop is established only for several countries in the dataset. 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. Furthermore, the presence of spatial patterns of house prices and credit highlight the need to consider global housing and credit developments for national policy making.
  Openness and Structural Labor Market Reforms: Ex-Ante CounterfactualsBank of Lithuania, 2016. PDF (with J. Stakėnas)   
https://doi.org/10.1111/coep.12280

 Bank of Lithuania Discussion Paper Series No 12016 
Contemporary Economic Policy, Vol 36 Issue 4, Oct 2018, p. 723-757 

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Codes, draft and data

 In this paper we examine plausible macroeconomic responses to the ex ante (planned but not implemented yet) reforms in the labor market, taking a currently proposed Social Model in Lithuania as an example. We contribute not only to the current debate on the efficacy of announced structural reforms, but also to the literature on policy evaluation, by assessing reforms from a global perspective. Taking trade linkages and openness into account, we demonstrate macroeconomic reactions to shocks in unemployment benefits, active labor market policies, and tax wedge on the reforming economy. In particular, we show that the omission of an international dimension could lead to seriously biased results on policy effects for any open and small economy. Using a satellite model for the intermediate trade, we link the global framework with the sectoral extensive margin, which changes some of the results derived from the aggregate data.  
  Structural Labour Market Reforms in the EU-15: Single-country vs. Coordinated Counterfactuals2017. (with J. Stakėnas) 
https://doi.org/10.1016/j.strueco.2017.11.001

 Structural Change and Economic Dynamics, Vol 44, Issue C, Mar 2018, p. 88-99

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 Online Appendix

Codes, draft and data

  Recent turbulent times have spurred a response by policy-makers to engage in a number of labour market reforms to enhance economic resilience and flexibility. Amid discussions about the most efficient ways to conduct such reforms, whether individually or simultaneously, we still lack evidence on the cross-country interactions and international interdependencies that may strengthen or weaken economic responses within an economic union. This paper deals with three policy tools – unemployment benefits, activation policies and the tax wedge, and demonstrates that they dissipate across open economies. We document evidence of both positive and negative policy spillovers among European economies and carry out a counterfactual of coordinated policies which prove to be needed for some but not other policy variables. We find that coordination strengthens macroeconomic responses to labour market policies. 

SELECTED WORKING PAPERS

Paper  

Outlet

Supplementary Materials

Abstract 

Global Impacts of US Monetary Policy Uncertainty

Shocks (with Anh D.M. Nguyen)
 WP coming soon 
 Codes soon

We build a new empirical model that allows estimation of the global impacts of an increase in the volatility of US monetary policy shocks. Specifically, the variance of structural shocks at the local model is time-varying due to a stochastic volatility specification, subjective to shocks as well as changes in the macroeconomic fundamentals. By allowing for a rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find evidence of the interest rate uncertainty driving output and inflation volatilities as well as causing output slump, deflation and a drop in the interest rate. We also document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy.

What Explains Excess Trade Persistence? A Theory of Deep Habits in Global Value Chains, 2020. (with M. Comunale and J. Dainauskas)  Updated WP coming soon 

 Codes soon

International trade flows are volatile, imbalanced, and fragmented into complex supply chains. Yet not much is known about the mechanism through which trade flows adjust in response to shocks over time. This paper derives a dynamic gravity equation from an inter-temporal model that generates reduced form trade persistence and trade imbalance in the wholesale distribution network characterized by deep habits in their supply chains. We estimate the dynamic gravity equation for 39 countries over the period of 1950-2014 and find that the trade persistence is three-fold lower than in the existing empirical gravity models. We thus add to the explanation of the "Great Trade Collapse" of 2008-09 and escape the excess trade persistence puzzle. This difference arises because we account for the unobservable global factors and allow for parameter heterogeneity specific to each country pair. In addition to the traditional variables in the gravity equation, we show that multilateral trade imbalance is an important determinant of bilateral trade flows both theoretically and empirically. We explore whether the trade persistence coefficient estimates identify the country-specific heterogeneity of deep habits, and if so, whether it is related to the global value chains as suggested by our theory. 
 Old Habits Die Hard: A Theory About Seemingly Missing Welfare Gains From Trade, 2020. (with J. Dainauskas) Updated WP coming soon

Codes soon

 This paper shows that the counter-cyclical and persistent price mark-up adjustments characterising the U.S. economy are important when quantifying the welfare consequences of trade policies. In our model, where consumers develop predictive inter-temporal patterns of consumption that producers anticipate when setting their optimal prices over time, movement to complete autarky relative to the status quo would cost the U.S. economy an additional 70% of consumption per capita compared to a static and deterministic model. Anticipated trade reforms take more time to fully transpire, and they take around 25% greater toll on the trade imbalances in the long run. 

 Does It Matter When Labor Market Reforms Are Implemented? The Role of the Monetary Policy Environment, 2019 (with J. Stakėnas)

CESIFO WP No. 7844

Bank of Lithuania WP No. 66


  Codes and data soon
 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 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 and increasing synchronized monetary and labor market policies across European countries.
A Coordination and Transmission Tale about Labor Market Reforms in Europe

Supersedes Global Perspective on the Structural Labour Market Reforms in Europe
Bank of Lithuania and
 University of Cambridge, 2015. PDF (with J. Stakenas) 



Codes soon
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?
Fiscal Policy and Trade Margins: An Educational ChannelUniversity of Cambridge, 2015. PDF (with R. Guadarrama-Baena) 

Cambridge Working Papers in Economics 1533Faculty of Economics, University of Cambridge, 2015



 This paper combines current literature on the heterogeneous firms in international trade with the public economics of fiscal policy. We study the nexus between the intensive and extensive margins of trade, and their relationship with fiscal policy. When taxes are collected through the fixed per-period production payments, borne by all active firms, they impact firm partitioning and exporting decisions, but are nevertheless left unmodelled and treated as a pure loss in the literature. Instead, we show theoretically how such taxes can be channelled back into an open economy through spending on education (thereby affecting workers' skill distribution in non-trivial ways), and contrast the result with the standard trade liberalisation exercise and a wasteful channel, which are prevalent in the literature. We estimate the model's predictions using a novel data set covering 40 countries from 1995 to 2011. Employing the instrumental-variable panel techniques, we find support to our main testable predictions: fixed production taxes, used as the source to fund education, create an educational channel on the aggregate expenditure and the extensive margin of trade. A decrease in expenditure and an increase in the extensive margin are both amplified once an educational channel is allowed for.
 Initial Employment Adjustment and Financial Frictions from the Outset of Lockdown Working Paper 
Codes
Data set
We use monthly administrative data, exploring firms' employment adjustments immediately after the imposition of the stringent lockdown. We use value-added tax payment changes as a proxy of the demand shock and explore employment adjustments. The most considerable adjustment happens among small firms with no significant effect among the largest companies. Though an average change is economically insignificant, we register a 0.06 percentage point reduction in employment growth rate per month for firms with less than 5% of VAT tax payments in April, compared to March (more than 9% of such firms in the sample). The pre-shock financial frictions led to larger employment reductions within the most capital intensive sectors, namely agriculture, manufacturing, construction, and real estate. Controlling for a market-determined or a strategic choice component in firms' adjustments confirms employment responsiveness results yet narrows down a negative role of pre-existing financial frictions to the real estate sector on average and education sector if large establishments were considered. 
  
BOOK CHAPTERS/POLICY CONTRIBUTIONS/ETC.

Title  

Details

 OECD Review of Lithuania’s Independent Fiscal Institution Expert of the Review team (report in PDF)
Heterogeneity and Convergence in EU28: 25 Years After Maastricht
in The Decade of Catching-Up: The Case of the EU and Asia
Conference logbook on the sixth conference of the Magyar Nemzeti Bank’s Lamfalussy Lectures Conference series, 4 February 2019, Magyar Nemzeti Bank, Hungary
Featured in Ferenc Tóth, Report on the 2019 Lámfalussy Lectures Conference,  Financial and Economic Review,  Vol. 18, Issue 1, March 2019
Whether and How Does Convergence Between EU and Lithuania Take Place? (in Lithuanian)Entry into the Book Solicited by The Ministry of Foreign Affairs of the Republic of Lithuania, titled "Lietuvos narystė Europos Sąjungoje: atskaitos taškai ir judėjimo kryptys", Naujasis židinys-Aidai, 2019 (ISBN 9786098163179)
Structural policies in the euro area (ed.by K. Masuch et al., ECB Occasional Paper Series No 210, 2018)
Member of the Task Force of the Monetary Policy Committee, 
the European System of Central Banks 
 Impact of labour market reforms on Lithuania’s economy (EN(with J. Stakėnas)Annex at the Lithuanian Economic Review, Bank of Lithuania, June 2016
Essays on international trade, labour, and technologyUniversity of Cambridge, Cambridge: United Kingdom
PhD Manuscript, 2014

OLDER WORKS


IDLE WORKS

Paper  

Outlet / Supplementary Materials

Abstract

Spatial Nexus in Crime and Unemployment in Times of Crisis, 2017. PDF (with E. Tatsi 

 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.