THE IMPACT OF THE FINANCIAL CRISIS ON CURRENT ACCOUNT SUSTAINABILITY IN LITHUANIA

The paper deals with the dynamics of Lithuania’s current account in two distinct periods – the period in the run-up to the 2008–2009 financial crisis and the period since the crisis. The two main goals of the paper are: 1) to assess the sustainability of the level of Lithuania’s current account in the period 1995–2015 using an empirical model based on the intertemporal optimisation approach, and 2) to identify the factors behind the observed trends in Lithuania’s current account in the two periods in question. The research has been conducted using the methods of empirical (regression) analysis, theoretical explanations, and descriptive analysis. The paper finds that the current account in Lithuania has been sustainable since 1995, except for two brief periods – the 1999 Russian crisis and in 2009 when Lithuania’s economy contracted by more than 15% in real terms due to the global financial crisis. The empirical research has also revealed a shift in the level of the sustainable current account in the post-crisis period but shows an existing gap between the sustainable and the actual current account in Lithuania. Considering the characteristics of Lithuania’s economy, the paper concludes that the actual level of the current account in Lithuania is not optimal from the intertemporal point of view.Key words: intertemporal optimisation, current account, deleveraging, rebalancing, capital flight

PRECAUTIONARY SAVINGS AND CPF CONTRIBUTIONS IN THE PRESENCE OF A BORROWING CONSTRAINT

The neutrality result that total private savings (voluntary and compulsory) are invariant to a change in the employee's CPF contribution rate has been derived by Hoon (1991) and Liew (2000), both of whom assumed perfect capital markets. It was shown by Lim (1994) to hold in a model with borrowing constraints as long as the latter are nonbinding. In this article, we integrate the phenomena of income uncertainty (from Liew) and borrowing constraints (from Lim) in a stochastic, intertemporal optimisation model. We demonstrate the existence of precautionary savings and, contrary to received thinking, the nonneutrality result of total savings to the employee's CPF contribution rate even for workers with positive voluntary savings. The broader implications of this result are also discussed.

Tanzania's soil wealth

This paper adopts soil scientific models of soil productivity and degradation in Tanzania into an intertemporal optimisation framework. The farmers choose labour input, capital investment and fertiliser input to maximise soil wealth, i.e., the present value of soil rent. First we focus exclusively on soil mining, considering the nutrient stocks as determinants of land productivity. Next, we focus on soil erosion, and include rooting depth as determinant of land productivity. We compute the soil wealth under the assumption that the opportunity cost of labour is equal to current wages, or alternatively equal to zero. Our estimates suggest that the potential gains from change in agricultural management are considerable. Moreover, the shadow price on root depth and hence the returns to land conservation investments are highly sensitive to our labour market assumptions. We also find that the value of the eroded soil amounts to 12–17 per cent of the value of Hicksian income, and the savings required to maintain consumption amounts to 13–29 per cent of the contribution to GDP.