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

Research interests: International {finance, macroeconomics, trade}. {Monetary, labor} policy. (De)globalization and spillovers/spillbacks. Micro-level adjustments (firms, households) to macro and global shocks, climate change


How Do Firms Adjust When Trade Stops? (with Aurelija Proškutė and Alminas Žaldokas). Bank of Lithuania Working Paper No 114, 2023. 

Journal of Economic Behavior and Organization, Vol 216, December 2023, p. 287-307. 


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We investigate how firms adjust to the introduction of sudden, unanticipated and eventually long-lasting economic sanctions. In 2014, Russia introduced sanctions on imports from Europe, which caused an abrupt negative shock to the food production sector in Lithuania. We find that part-time employment is used as the first shock absorber, followed by investment and full-time employment. At the same time, firms dampen shock effects by expanding to other export markets. To rationalize this firm behavior, we provide a theoretical mechanism where forward-looking firms face nonconvexities in the labor market along with heterogeneous variable trade costs.

Global Impacts of US Monetary Policy Uncertainty Shocks (with Anh D.M. Nguyen). European Central Bank Working Paper Series No 2513, 2021; Bank of Lithuania Working Paper Series No 84, 2020. 

Journal of International Economics, Vol 145, November 2023, 103830. 10.1016/j.jinteco.2023.103830 

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We build a new empirical model, which admits time-varying variances of local structural shocks, to estimate the global impact of an increase in the volatility of US monetary policy shocks. By allowing for rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate. We 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.

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

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.

Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins (with C. Papageorgiou and J. D. Araujo). 

Journal of Money, Credit and Banking, Vol 49, Issue 7, Oct 2017, p. 1517–1554. 10.1111/jmcb.12423

Earlier version:   Bank of Lithuania Working Paper Series No 37, 2016

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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. 


Spillover Effects of US Monetary Policy on Emerging Markets Amidst Uncertainty (with Anh D.M. Nguyen). 

Journal of International Financial Markets, Institutions and Money, Vol 92, April 2024, 101956.

Working paper version: arXiv:2402.07266


This paper examines the impact of US monetary policy tightening on emerging markets, distinguishing between direct and indirect spillover effects using the global vector autoregression with stochastic volatility covering 32 countries. The paper shows that an increase in the US interest rate significantly reduces output for emerging markets, leading to larger, more prolonged, and persistent declines. Such an impact is further intensified by global trade integration, causing a sharper yet slightly quicker rebounding output drop. The spillover effects are significantly amplified when US monetary policy tightening is accompanied by an increase in monetary policy uncertainty. Finally, emerging markets exhibit considerable heterogeneity in their responses to US monetary policy shocks.

Dancing Alone or Together: The Dynamic Effects of Independent and Common Monetary Policies  (with J. Stakėnas). 

Advances in Econometrics, Vol 43A, Ch. 10, Essays in Honor of Hashem M. Pesaran: Prediction and Macro Modeling, 2022. 

Earlier version: Bank of Lithuania Working Paper Series No 87, 2021


What would have been the hypothetical effect of monetary policy shocks had a country never joined the euro area, in cases where we know that the country in question actually did join the euro area? It is one thing to investigate the impact of joining a monetary union, but quite another to examine two things at once: joining the union and experiencing actual monetary policy shocks. We propose a methodology that combines synthetic control ideas with the impulse response functions to uncover dynamic response paths for treated and untreated units, controlling for common unobserved factors. Focusing on the largest euro area countries, Germany, France, and Italy, we find that an unexpected rise in interest rates depresses inflation and significantly appreciates exchange rate, whereas GDP fluctuations are less successfully controlled when a country belongs to the monetary union than would have been the case under the independent monetary policy. Importantly, Italy turns out to be the overall beneficiary, since all three channels – price, GDP, and exchange rate – deliver the desired results. We also find that stabilizing an economy within a union requires somewhat smaller policy changes than attempting to stabilize it individually, and therefore provides more policy space.

Lockdown, Employment Adjustment, and Financial Frictions

Small Business Economics, Vol 58, 2021, p. 919-942

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We examine firms' employment adjustments immediately after the imposition of stringent lockdown. In doing so, we use monthly administrative data, and take value-added tax payment changes as a proxy for the demand shock. We merge data with COVID-19 tests, classified by economic activity, and employ a fixed effects instrumental variable regression. We find that all sized firms in the manufacturing sector reduced employment more if they had uncovered tax liabilities before the lockdown. Among small firms, real estate and service sector firms downsized more rapidly. While employment changes are rather modest, this very early evidence points to the need to address liquidity needs and firm pre-conditions among capital-intensive and service firms and, in particular, small businesses, to avoid employment losses. 

Labour Market Institutions in Open Economy: Sectoral Reallocations, Aggregate Adjustments, and Spillovers (with J. Stakėnas). 

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

Earlier version:  Bank of Lithuania Working Paper Series No 33, 2016. 

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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.

Knotty Interplay Between Credit and Housing (with M. Constantinescu). 

The Quarterly Review of Economics and Finance, Vol 70, Nov 2018, p. 241-266.

Earlier version:  Bank of Lithuania Working Paper Series No 45, 2017

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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 Counterfactuals (with J. Stakėnas). 

Contemporary Economic Policy, Vol 36 Issue 4, Oct 2018, p. 723-757.

Earlier version:  Bank of Lithuania Discussion Paper Series No 1, 2016 

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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 Counterfactuals (with J. Stakėnas). 

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

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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.  


Trade Shocks and the Transitional Dynamics of Markups (with J. Dainauskas). Cambridge Working Papers in Economics, CWPE2431. PDF


We show that U.S. trade protectionism shocks cause the cyclical component of the aggregate U.S. price markup to increase significantly over time. However, if trade barrier announcements are covered by the media, which may help form expectations about the future, we find that the aggregate U.S. price markup response is zero upon impact, if not negative, before it eventually rises. We develop a simple canonical model of trade adjustment dynamics driven by habits in consumer preferences that replicates these empirical responses and use it to quantify the welfare implications. In the model, firms cut markups preemptively in anticipation of future trade barriers by factoring in the time that it takes to wean addicted consumers off of imported varieties.

International trade flows are volatile, imbalanced, and fragmented across off-shored 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 a theory of habits in the supply chains that generates autocorrelated bilateral trade flows that are heterogeneous across different country pairs. We estimate our version of the dynamic gravity equation for 39 countries over the period of 1950-2014 and find that the transmission of local and global trade shocks is fundamentally different. We show that the trade persistence coefficient falls from 0.91 to 0.35 when we depart from the existing empirical gravity models that draw inference from the pooled coefficient estimates without controlling for the variation in the unobservable global factors. Thus, our approach escapes the excess trade persistence puzzle and adds to the explanation of the sharp decline and the rapid recovery of the global trade flows during the "Great Trade Collapse" of 2008-09. In addition to the traditional variables in the gravity equation, we also show that a cross-country habit asymmetry creates bilateral and multilateral trade imbalances, which are an important determinant of bilateral trade flows both theoretically and empirically.

Featured in the Bank of Lithuania governor's speech here (in Lithuanian).

Dynamics of Household Spending: The Role of House Price-Rent Spread and Credit Frictions (with K. Bielskis). Revisions requested at Journal of Economic Behavior & Organization


The demand side and household balance sheets are essential drivers of aggregate fluctuations, particularly household consumption spending. We introduce the house price-rent spread variable, which captures expectations about the residential property's future worthiness, into a simple model with an optimizing household sector and the borrowing frictions. We test key model's predictions on half-century data from 28 OECD countries and confirm the prediction of a substantial amplification effect when shocks to credit and spread variables occur simultaneously. The house price-rent spread is also documented to be considerably more persistent than the credit shock, which is shown to produce the `boom-bust' dynamics. Importantly, macro-prudential interventions that tackle credit conditions or expectations about future asset prices separately are severely less effective due to significant complementarities that exist between the two.

Does It Matter When Labor Market Reforms Are Implemented? The Role of the Monetary Policy Environment (with J. Stakėnas). CESIFO Working Paper No. 7844; Bank of Lithuania Working Paper Series No. 66. Revisions requested at Economic Modelling


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.

Labor Market Policies in the Economic Union: Long-run Restrictions, Spillovers, and Policy Synchronization (with J. Stakėnas). Updated version. It supersedes Global Perspective on the Structural Labour Market Reforms in Europe,  Cambridge Working Papers in Economics 1534, Faculty of Economics, University of Cambridge, 2015; Bank of Lithuania Working Paper Series No 21, 2015.


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 Channel (with R. Guadarrama-Baena). Cambridge Working Papers in Economics 1533, Faculty 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 channeled 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.


The implications of globalisation for the ECB monetary policy strategy, ECB Occasional Paper Series No 263. Co-ordinator of the report and contributor of the work-stream on globalisation, ECB’s Monetary Policy Strategy Review, 2020-2021

OECD Review of Lithuania’s Independent Fiscal Institution.  Expert of the Review team

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 ( 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 (with J. Stakėnas). Annex at the Lithuanian Economic Review, Bank of Lithuania, June 2016


Spatial Nexus in Crime and Unemployment in Times of Crisis (with E. Tatsi). Cambridge Working Papers in Economics 1359, Faculty of Economics, University of Cambridge; University of Southern California-INET Research Paper No. 17-08 

Best Graduate Student Paper Award during the VI World Conference of the Spatial Econometrics Association, Salvador, Bahia, Brazil


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. 


Geopolitical Uncertainties and Trade Intermediaries,  joint with Aurelija Proškutė and Alminas Žaldokas, funded by the HKUST Institute for Emerging Market Studies 

The Heterogeneous Impact of Firm Upgrading on Energy Use, joint with Mustapha Douch and Ziran (Josh) Ding

The Real and Nominal Faces of the EU28 Convergence Coin, work in progress, joint with Camilo Marchesini

IT Revolution and Labor Share in an Interdependent World, joint with Kohei Maehashi (Bank of Japan)

Modes of Financing in International Trade, work in progress, joint with Anna Watson, University of Cambridge.

the equation of heaven and earth remains unsolved /Yehuda Amichai/