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Real Exchange Rate in Latvia (1994-2001)

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  • Martins Bitans
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    Abstract

    The analysis of the exchange rate in Latvia presented in this publication covers the period from 1994 until 2001. The analysis has been based on two commonly used methods: the single equation approach and macroeconomic balance approach. The existing fundamental variables in the economy warrant the exchange rate that is undervalued relative to its equilibrium. Therefore, the current exchange rate in Latvia generally corresponds to the current stage of economic development. The real appreciation of the exchange rate with respect to West European countries is in line with the appreciation of the trend exchange rate, which is driven mainly by rising productivity in the tradable sector. Therefore, the appreciation of the real exchange rate from 1994 to 2001 has not generally harmed foreign trade. As long as real appreciation is supported by underlying fundamental variables in the economy, it does not endanger the macroeconomic stability and growth.

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    Bibliographic Info

    Paper provided by Latvijas Banka in its series Working Papers with number 2002/01.

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    Date of creation: 28 Nov 2002
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    Handle: RePEc:ltv:wpaper:200201

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    Keywords: real exchange rate; foreign trade;

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    1. Asea, Patrick K & Mendoza, Enrique G, 1994. "The Balassa-Samuelson Model: A General-Equilibrium Appraisal," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 244-67, October.
    2. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1996. "Relative Labour Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries," CEPR Discussion Papers 1464, C.E.P.R. Discussion Papers.
    3. Takatoshi Ito & Peter Isard & Steven Symansky, 1999. "Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues (NBER-EASE volume 7), pages 109-132 National Bureau of Economic Research, Inc.
    4. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    5. Anthony J. Richards & Gunnar Tersman, 1995. "Growth, Nontradables, and Price Convergence in the Baltics," IMF Working Papers 95/45, International Monetary Fund.
    6. Frederic S. Mishkin, 1998. "Strategies for Controlling Inflation," NBER Working Papers 6122, National Bureau of Economic Research, Inc.
    7. Ernesto Hernández-Catá, 1999. "Price Liberalization, Money Growth, and Inflation During the Transition to a Market Economy," IMF Working Papers 99/76, International Monetary Fund.
    8. Alf Vanags, 1998. "Macroeconomic stabilisation and central bank policy in Latvia," Post-Communist Economies, Taylor & Francis Journals, vol. 10(2), pages 203-215.
    9. By A. Javier Hamann, 2001. "Exchange-Rate-Based Stabilization: A Critical Look at the Stylized Facts," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 4.
    10. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
    11. Stephen G. Cecchetti & Erica L. Groshen, 2000. "Understanding Inflation: Implications for Monetary Policy," NBER Working Papers 7482, National Bureau of Economic Research, Inc.
    12. Jorge A. Chan-Lau & Stephen Tokarick, 1999. "Why Has Inflation in the United States Remained so Low? Reassessing the Importance of Labor Costs and the Price of Imports," IMF Working Papers 99/149, International Monetary Fund.
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    Cited by:
    1. Égert, Balázs, 2005. "Equilibrium exchange rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," BOFIT Discussion Papers 3/2005, Bank of Finland, Institute for Economies in Transition.
    2. Jesus Crespo Cuaresma & Jarko Fidrmuc & Maria Antoinette Silgoner, 2004. "Exchange Rate Developments and Fundamentals in Four EU Accession and Candidate Countries: Bulgaria, Croatia, Romania and Turkey," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 119-137.
    3. Lucian Claudiu ANGHEL & Florina PINZARU & Mihaela DINU & Laurentiu-Mihai TREAPAT, 2014. "Fixing the Central Parity and the Evolution of the Currency within the Exchange Rate Mechanism II in the Countries that Joined the Euro Zone," Management Dynamics in the Knowledge Economy Journal, College of Management, National University of Political Studies and Public Administration, vol. 2(4), pages 21-40, April.
    4. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries: Can we have DEER with BEER without FEER? A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland, Institute for Economies in Transition.
    5. Viktors Ajevskis & Ramune Rimgailaite & Uldis Rutkaste & Olegs Tkacevs, 2012. "The Assesment of Equilibrium Real Echange Rate of Latvia," Working Papers 2012/04, Latvijas Banka.

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