Personal Income Tax Reform in Lithuania: Macroeconomic and Welfare Implications

In this paper, the economic impact of the 2006–2008 personal income tax (PIT) reform in Lithuania is analyzed applying model-based simulations. We find that the undertaken PIT reform is unsustainable as it leads to permanent government budget deficits and ever increasing public debt. This result holds even allowing for endogenous reduction in tax evasion. After introducing permanent compensatory fiscal measures ensuring long-term sustainability of the PIT reduction, we demonstrate that the lower PIT produces higher output and lower prices in the long run. Higher domestic spending is supported by higher employment and after-tax wages. Moreover, following a reduction in the marginal production costs, producer prices fall enhancing economy’s international competitiveness and boosting domestic exports. Pre-announcement of the tax reform implies early macroeconomic reaction, and thus in most cases smoother adjustment of the economy to the tax change.fiscal policy, taxation, tax evasion, dynamic general equilibrium model

The German block of the ESCB multi-country model

The paper presents the German block of the ESCB multi-country model. It builds on previous modelling work on the Area Wide Model and other country blocks of the ESCB multicountry-model. Whilst being analogous to these models in following a common modelling approach and the same theoretical framework, the German model has also some unique features for instance with regard to the modelling of the investment components, imports and employment. The paper provides a brief overview of the theoretical framework of the model, its estimation results, and a discussion of the dynamic model properties. The model is primarily used for preparing quarterly projections for the German economy as well as for policy analysis. JEL Classification: C3, C5, E1, E2Germany, Macro-econometric Modelling

Dollarization in Lithuania: An Econometric Approach

The paper analyses the factors driving dollarization in Lithuania during the period from December 1992 to August 2000. Starting with a brief overview of the major economic and political developments in Lithuania, the study attempts to model the process of dollarization by applying rigorous time series analysis. In particular, it investigates the long- and short-run properties of the relationship between the dollarization ratio and interest rates paid on domestic and foreign currency deposits. The study identifies a relatively stable cointegrating relationship between variables, whereby the dollarization ratio is negatively related to the interest rate spread. In the constructed vector error correction model, the deviations from the long-run relationship are found be significant for the dynamics of all three variables. Overall, the model explains the development of dollarization rather well. Simple specification of the model is possible when interest rates reflect the major economic and political events relevant to the process of dollarization.dollarization; transition economy; currency board; unit roots; cointegration; vector error-correction

Profit Dynamics across the Largest Euro Area countries and Sectors

This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors.Profits, sectoral determinants, VARs, impulse responses, historical decomposition

Profit dynamics across the largest euro area countries and sectors

This paper explores the behavior of profits in the four largest euro area countries (Germany, France, Italy and Spain) and the euro area as a whole, while at the same time considering three main sectors (manufacturing, construction and services) in each economy over the period 1988–2010. The paper presents stylized facts about profit developments and, applying a vector autoregressive modeling framework, discusses the sensitivity of profits to four distinctive structural shocks (a demand shock, an employment shock, a wage and price mark-up shocks). In addition, it provides the shock decomposition of historical developments in profits across countries and sectors. JEL Classification: C32, E23, E25historical decomposition, Impulse responses, Profits, sectoral determinants, VARs

Potential output in DSGE models

In view of the increasing use of Dynamic Stochastic General Equilibrium (DSGE) models in the macroeconomic projections and the policy process, this paper examines, both conceptually and empirically, alternative notions of potential output within DSGE models. Furthermore, it provides historical estimates of potential output/output gaps on the basis of selected DSGE models developed by the European System of Central Banks’ staff. These estimates are compared to the corresponding estimates obtained applying more traditional methods. Finally, the paper assesses the usefulness of the DSGE model-based output gaps for gauging inflationary pressures. JEL Classification: E32, E37, E52monetary policy, potential output, simulation and forecasting models

Potential Output in DSGE Models

In view of the increasing use of Dynamic Stochastic General Equilibrium (DSGE) models in the macroeconomic projections and the policy process, this paper examines, both conceptually and empirically, alternative notions of potential output within DSGE models. Furthermore, it provides historical estimates of potential output/output gaps on the basis of selected DSGE models developed by the European System of Central Banks’ staff. These estimates are compared to the corresponding estimates obtained applying more traditional methods. Finally, the paper assesses the usefulness of the DSGE model-based output gaps for gauging inflationary pressures.potential output, simulation and forecasting models, monetary policy

Extending the NAWM for the import content of exports

In this document, we set out the details for extending the New Area-Wide Model (NAWM; cf. Christoffel, Coenen and Warne, 2008) with a non-zero import content of exports. We first describe the technology used by the intermediate-good firms for producing their differentiated outputs sold abroad. We then formulate the modified market clearing conditions as well as the aggregate resource constraint for the extended model. Finally, we outline the computation of the modified steady state

Extending the NAWM for the import content of exports

In this document, we set out the details for extending the New Area-Wide Model (NAWM; cf. Christoffel, Coenen and Warne, 2008) with a non-zero import content of exports. We first describe the technology used by the intermediate-good firms for producing their differentiated outputs sold abroad. We then formulate the modified market clearing conditions as well as the aggregate resource constraint for the extended model. Finally, we outline the computation of the modified steady state

The Implementation of Scenarios using DSGE Models

The new generation of dynamic stochastic general equilibrium (DSGE) models seems particularly suited for conducting scenario analysis. These models formalise the behaviour of economic agents on the basis of explicit micro-foundations. As a result, they appear less prone to the Lucas critique than traditional macroeconometric models. DSGE models provide researchers with powerful tools, which allow for the design of a broad range of scenarios and can tackle a large range of issues, while at the same time offering an appealing structural interpretation of the scenario specification and simulation results. This paper provides illustrations of some of the modelling issues that often arise when implementing scenarios using DSGE models in the context of projection exercises or policy analysis. These issues reflect the sensitivity of DSGE model-based analysis to scenario assumptions, which in more traditional models are apparently less critical, such as, for example, scenario event anticipation and duration, as well as treatment of monetary and fiscal policy rules.Business fluctuations, monetary policy, fiscal policy, forecasting and simulation