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Working Paper Series in Economics
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No. wp2025-05
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- Jaanika Merikyll and Matthias Rottner
- Monetary policy and earnings inequality.Inflation dependencies
This paper studies the distributional effects of monetary policy and its dependence
on inflation. We document a novel dependency in the earnings heterogeneity channel
of monetary policy using high-frequency, administrative tax data from eurozone
member Estonia. Monetary policy shocks substantially influence earnings inequality
during high-inflation periods, with weaker effects during low-inflation periods.
Extending our dataset with granular MPC estimates, we show that earnings heterogeneity
amplifies the aggregate MPC and consumption response. In high-inflation
periods, consumption and inequality respond more, even though the aggregate MPC
may be lower. We rationalise our findings with a nonlinear tractable HANK model
featuring inflation dependencies.
- JEL-Codes: E52, D31, J31, J63
- Keywords: Monetary policy, labour income inequality, inflation, state dependency, earnings heterogeneity channel, aggregate MPC
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No. wp2025-04
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- Jaanika Merikyll
- The impact of early pension withdrawals on household finances and inflation
This paper exploits Estonia’s pension reform in 2021 to examine how a largescale
income shock impacts household finances and inflation. The reform made the
second-pillar pension contributions voluntary and allowed early withdrawals before
retirement age. One-fifth of contributors withdrew their pension savings as soon as
this option became available. Using National Accounts (NA) and Distributional
Wealth Accounts (DWA) data from the third quarter of 2013 to the third quarter of
2022, we apply a synthetic differences-in-differences method to assess aggregatelevel
impacts. We explore the household-level dynamics by applying data from the
Household Finance and Consumption Survey (HFCS). The reform led to a rise in
deposits alongside a reduction in consumer debt balances. However, there was also
a strong response in consumption as the consumption of leavers went up
substantially, suggesting a marginal propensity to consume (MPC) of 15% of the
amount withdrawn early from pensions. The positive balance sheet effects declined
over a year, and consumption stayed elevated, keeping quarterly inflation 1–2
percentage points higher than it would otherwise have been. Withdrawals were
concentrated among households with a high MPC, amplifying the reform’s impact
on consumption.
- JEL-Codes: D12, D14, E21, H55, E65
- Keywords: Pension reform, liquidity shock, consumption, MPC, savings, debt, inflation, Distributional Wealth Accounts, Household Finance and Consumption Survey
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No. wp2025-03
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- Triin Bulõgina and Merike Kukk
- How the large-scale early withdrawals from private pension plans were used: insights from young adults
This paper investigates the spending and financial behaviour of young adults in
Estonia after they withdrew their pension savings from the previously mandatory
second pillar. When the option was first implemented in 2021, one pension saver in
five exercised it. We use account-level data to explore changes in spending and
investing behaviour, and in bank savings and debt holdings among those withdrawing.
Regression analysis of differences in growth rates over various time
horizons between matched samples reveals that early withdrawals have substantial
short-term impacts on spending and the financial situation of those making the
withdrawal, but these effects subside within one year. Over 55% of the money
withdrawn had been spent within three months and over 40% was used for repaying
debts. The findings indicate that those who withdrew savings from their pension
accounts did not adopt alternative retirement saving strategies, suggesting that early
withdrawals worsen their long-term financial outlook.
- JEL-Codes: D12, D14, G51, H55
- Keywords: Pension savings, second pillar, early withdrawals, young adults, spending, loans, investments
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No. wp2025-02
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- Fabio Canova and Natalia Levenko
- Is there club convergence in the European housing markets?
We analyse real residential property prices and housing affordability in
13 European countries from 1975Q1 to 2023Q4 and find no significant evidence of
convergence. Canova’s (2004) procedure fails to detect convergence clubs for the
full sample. The Kolmogorov-Smirnov test gives only slight indications of
temporary clustering. The increasing heterogeneity in house prices and affordability
observed since the 2020s is expected to persist into the 2040s. Population growth
and supply-side factors drive the heterogeneity, and recessions amplify house price
dispersion but reduce affordability dispersion. Looser borrower-based macroprudential
policies are associated with lower dispersion in both house prices and
affordability.
- JEL-Codes: C11, E31, E32, G28, O47, O52, R31
- Keywords: House prices, housing affordability, convergence, European housing markets, macroprudential policy
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No. wp2025-01
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- Nicolas Reigl
- Determinants of Non-Performing Loans: An Empirical Analysis Across Major Sectors
This paper investigates the determinants of non-performing bank loans
(NPLs) across six key sectors in Estonia from 2005 to 2023, employing a dynamic
linear regression model. The analysis focuses on agriculture, manufacturing,
construction, wholesale and retail trade, transportation, and real estate.
The model incorporates both macroeconomic factors like unemployment
and real GDP growth, and sector-specific financial variables including sectorspecific
bank lending interest rates and profitability indicators. The results
reveal strong persistence in NPLs across all sectors, with business cycle indicators,
particularly the unemployment rate, consistently explaining variations
in NPLs, albeit with varying impact across sectors. Sector-specific variables
generally play a less important role, except in the wholesale and retail trade
sector, where leverage and profitability correlate more significantly with credit
risk.
- JEL-Codes: G01, G21, E32, E44
- Keywords: non-performing loans, banking sector, corporate debt, business cycles
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No. wp2024-7
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- Gerda Kirpson
- Consumer inflation expectations
before and after the 2022 inflation spike:
the role of perceived and realised inflation
This paper examines how the formation of consumer inflation expectations in
the euro area changed following the inflation spike in 2022, focusing on the
relationship between expected, perceived and realised inflation. The study uses
individual-level panel data from the European Central Bank’s Consumer
Expectation Survey and employs a mixed-method approach to estimate fixed and
random effects across two sub-periods. It finds that before 2022, inflation
perceptions influenced expectations strongly, while realised inflation had no
impact, but from 2022 onwards, the influence of perceptions on expectations was
reduced, and realised inflation mattered. The findings, which are robust across
different specifications and country-level analyses, align with the rational
inattention theory, suggesting that attention to inflation information shifts with
economic conditions
- JEL-Codes: D84; E31; E58
- Keywords: consumer inflation expectations, inflation perceptions, survey data, rational inattention, Consumer Expectation Survey (CES)
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No. wp2024-6
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- Ludmila Fadejeva, Valentin Jovanceau and Alari Paulus
- Consumer price rigidity in the Baltic states
during periods of low and high inflation
The Baltic states experienced the most substantial consumer price inflation of any of the
EU countries shortly after the COVID-19 pandemic. The year-on-year all-items inflation
rate averaged 11% from January 2021 to September 2023, peaking at around 22% in late
2022. This study examines how consumer price rigidity in the region during this period
of high inflation differed from the preceding period of low inflation in 2019-2020. We use
the detailed price records that underlie the official consumer price indexes to assess the
frequency and the size margins of price changes. The average frequency of price changes
increased by about four percentage points when inflation was high, as an increase of five
percentage points in the frequency of price increases combined with a fall of one percentage
point in the frequency of price cuts. The average size of price changes increased by 2.8
percentage points, mainly because the share of price increases changed. We further show
that structural shocks in energy prices and aggregate demand contributed significantly to
fluctuations in the inflation rate through the frequency of price changes during the period
of high inflation. All this points to pricing being state-dependent in the Baltic states.
- JEL-Codes: D40, E31
- Keywords: consumer price rigidity, price-setting, high inflation, frequency of price changes
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No. wp2024-5
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- Tibor Lalinsky, Jaanika Merikyll and Paloma Lopez-Garcia
- Productivity-enhancing reallocation
during the Covid-19 pandemic
This paper studies how the Covid-19 pandemic and the extensive job retention support that
accompanied it affected productivity in Europe. The focus is on the reallocation channel
and productivity-enhancing reallocation of jobs, following Foster et al., 2016. An extensive
micro-distributed analysis of firm-level data for 11 euro area countries is used. The
unique firm-level datasets are constructed by merging balance-sheet and income-statement
data with policy support data. The paper exploits variation in employment responsiveness
to productivity over time, particularly examining the relationship between changes in
employment responsiveness and the job retention support in 2020 and studying how well
the support was targeted by firm productivity. Acknowledging limitations of a small set of
countries covered and occasionally large confidence bounds around estimates, the findings
suggest that (1) productivity-enhancing reallocation was weaker in the pandemic than in
the Great Recession; (2) The countries that were more generous with job retention support
and countries where more support was allocated to low-productivity firms showed weaker
productivity-enhancing reallocation in 2020.
- JEL-Codes: D22, H25, J38, L29
- Keywords: Productivity-enhancing reallocation, Covid-19, adjustment of firms, job retention support, cross-country analysis
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