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Latvia’s Recession: The Cost of Adjustment With An “Internal Devaluation”

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  • Mark Weisbrot
  • Rebecca Ray

Abstract

The Latvian recession, which is now more than two years old, has seen a world-historical drop in GDP of more than 25 percent. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. This would make Latvia’s loss more than that of the U.S. Great Depression downturn of 1929-1933. This paper argues that the depth of the recession and the difficulty of recovery are attributable in large part to the decision to maintain the country’s overvalued fixed exchange rate, because it prevents the government from pursuing the policies necessary to restore economic growth.

Suggested Citation

  • Mark Weisbrot & Rebecca Ray, 2010. "Latvia’s Recession: The Cost of Adjustment With An “Internal Devaluation”," CEPR Reports and Issue Briefs 2010-02, Center for Economic and Policy Research (CEPR).
    • Handle: RePEc:epo:papers:2010-02
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    File URL: http://www.cepr.net/documents/publications/latvia-recession-2010-02.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-472, May.
    2. Charles Calomiris, 2007. "Devaluation with contract redenomination in Argentina," Annals of Finance, Springer, vol. 3(1), pages 155-192, January.
    3. Roberto Frenkel, 2007. "Argentina: The Central Bank in the Foreign Exchange Market," CEPR Reports and Issue Briefs 2007-03, Center for Economic and Policy Research (CEPR).
    4. Jose Antonio Cordero, 2009. "The IMF’s Stand-by Arrangements and the Economic Downturn in Eastern Europe: The Cases of Hungary, Latvia, and Ukraine," CEPR Reports and Issue Briefs 2009-31, Center for Economic and Policy Research (CEPR).
    5. Roberto Frenkel & Martín Rapetti, 2007. "Argentina's Monetary and Exchange Rate Policies after the Convertibility Regime Collapse," CEPR Reports and Issue Briefs 2007-12, Center for Economic and Policy Research (CEPR).
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    Cited by:

    1. Hartmut Lehmann & Tiziano Razzolini & Anzelika Zaiceva, 2020. "The Great Recession and Labor Market Adjustment: Evidence from Latvia," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(1), pages 149-181, March.
    2. Insel, Aysu & Korkmaz, Abdurrahman, 2010. "The contagion effect: evidences from former Soviet Economies in Eastern Europe," MPRA Paper 24999, University Library of Munich, Germany.
    3. Cristina Matos, 2013. "The Shifting Welfare State in Hungary and Latvia," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(4), pages 851-891, October.
    4. Juan Antonio Montecino & Jose Antonio Cordero, 2010. "Capital Controls and Monetary Policy in Developing Countries," CEPR Reports and Issue Briefs 2010-10, Center for Economic and Policy Research (CEPR).

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    More about this item

    Keywords

    IMF; Latvia; EU; exchange rates; peg;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O - Economic Development, Innovation, Technological Change, and Growth
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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