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Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies

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  • Margarita Rubio

    () (University of Nottingham)

  • Mariarosaria Comunale

    () (Bank of Lithuania)

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.

Suggested Citation

  • Margarita Rubio & Mariarosaria Comunale, 2016. "Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies," Bank of Lithuania Working Paper Series 34, Bank of Lithuania.
  • Handle: RePEc:lie:wpaper:34
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    References listed on IDEAS

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    Cited by:

    1. Mariarosaria Comunale, 2017. "Synchronicity of real and financial cycles and structural characteristics in EU countries," CEIS Research Paper 414, Tor Vergata University, CEIS, revised 25 Sep 2017.
    2. Michael Funke & Petar Mihaylovski & Adrian Wende, 2018. "Out of Sync Subnational Housing Markets and Macroprudential Policies," CESifo Working Paper Series 6887, CESifo Group Munich.
    3. repec:eee:ecosys:v:42:y:2018:i:1:p:75-90 is not listed on IDEAS

    More about this item

    Keywords

    Macroprudential policy; housing market; LTV; monetary union; financial stability;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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