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Adjustment Under a Currency Peg

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  • Catriona Purfield
  • Christoph B. Rosenberg
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    Abstract

    The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/213.

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    Length: 34
    Date of creation: 01 Sep 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/213

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    Related research

    Keywords: Baltics; Currency pegs; Debt restructuring; Global competitiveness; Labor market policy; Stabilization measures; wage; benefits; fiscal adjustment; wages; fiscal balance; wage adjustment; fiscal deficit; fiscal positions; wage costs; fiscal adjustments; tax rates; public finances; fiscal deficits; minimum wage; fiscal policies; wage increases; fiscal balances; fiscal sustainability; compensation; tax systems; tax cuts; tax burden; fiscal policy; taxation; tax revenue; tax compliance; wage reductions; government spending; salaries; public sector wage; tax system; wage policy; budget deficit; tax base; tax collection; account deficits; fiscal imbalances; public expenditures; loose fiscal policy; tax administration; fiscal surpluses; tax bases; fiscal funding; worker; debt service; wage levels; fiscal measures; fiscal affairs; unemployment insurance; retirement age; tax revenues; fiscal constraints; fiscal limits; wage policies; fiscal gaps; fiscal deficit target; aggregate demand; budget allocations; severance pay; government budgets; maternity benefits; fiscal affairs department; fiscal consolidation; fiscal targets;

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    1. Lawless, Martina & Babecký, Jan & Du Caju, Philip & Kosma, Theodora & Messina, Julián & Rõõm, Tairi, 2009. "Downward Nominal and Real Wage Rigidity:Survey Evidence from European Firms," Research Technical Papers 11/RT/09, Central Bank of Ireland.
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    Cited by:
    1. Konstantīns Beņkovskis, 2012. "Competitiveness of Latvia's exporters," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, Baltic International Centre for Economic Policy Studies, vol. 12(2), pages 17-45, December.
    2. Brizga, Janis & Feng, Kuishuang & Hubacek, Klaus, 2014. "Drivers of greenhouse gas emissions in the Baltic States: A structural decomposition analysis," Ecological Economics, Elsevier, Elsevier, vol. 98(C), pages 22-28.

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