Lithuania in the euro area: monetary transmission and macroprudential policies

Rubio, Margarita; Comunale, Mariarosaria

Abstract

In this paper, we develop a two-country monetary union new Keynesian general equilibrium model with housing and collateral constraints, to be calibrated for Lithuania and the rest of the euro area. Within this setting, and following the recent entrance of Lithuania in the EMU, the aim of this paper is twofold. First, we study how shocks are transmitted differently in the two regions, considering the recent common monetary policy. Then, we analyze how macroprudential policies should be conducted in Lithuania, in the context of the EMU. As a macroprudential tool, we propose a decentralized Taylor-type rule for the LTV which responds to national deviations in output and house prices. We find that, given the housing market features in Lithuania, common shocks are transmitted more strongly in this country than in the rest of the euro area. In terms of macroprudential policies, results show that the optimal policy in Lithuania with respect to the euro area may have a different intensity and that it delivers substantial benefits in terms of financial stability.

Citation

Rubio, M., & Comunale, M. (in press). Lithuania in the euro area: monetary transmission and macroprudential policies. Eastern European Economics, 55(1), https://doi.org/10.1080/00128775.2016.1255558

• Journal Article Type: Article
• Acceptance Date: Oct 16, 2016
• Online Publication Date: Dec 16, 2016
• Deposit Date: Oct 31, 2016
• Publicly Available Date: Dec 16, 2016
• Journal: Eastern European Economics
• Print ISSN: 0012-8775
• Electronic ISSN: 1557-9298
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 55
• Issue: 1
• DOI: https://doi.org/10.1080/00128775.2016.1255558
• Keywords: Macroprudential policy, housing market, LTV, monetary union, Önancial stability
• Public URL: https://nottingham-repository.worktribe.com/output/833109
• Publisher URL: http://www.tandfonline.com/doi/full/10.1080/00128775.2016.1255558
• Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in Eastern European Economics on 16.12.2016, available online: http://www.tandfonline.com/10.1080/00128775.2016.1255558
• Contract Date: Oct 31, 2016