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Impact of the Euro Adoption on the Economy of Latvia

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  • Martins Bitans
  • Egils Kauzens
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    Abstract

    In the past decade, Latvia's macroeconomic structure and the financial system have undergone momentous and radical changes, and the experience gained so far supports the assumption that the economy has been able to adjust effectively to changes in external environment. The calculations based on the gravity model analysis demonstrate that over longer horizons Latvia's GDP might be up to 19% higher than under a hypothetical scenario of Latvia preserving its national currency. Several indicators of the national structural development (structural changes of GDP sectors, structure of foreign trade broken down by trade partner and main commodity group, etc.) and the analysis of cyclical economic volatility show that in terms of real convergence Latvia often differs substantially from large euro area countries and only on few occasions Latvia's respective indicators display close similarity to the indicators of countries known as the periphery. It does not necessarily imply that along with the euro adoption the impact and periodicity of asymmetric shocks in Latvia are going to increase.

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    Bibliographic Info

    Paper provided by Latvijas Banka in its series Working Papers with number 2004/02.

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    Date of creation: 12 Oct 2004
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    Handle: RePEc:ltv:wpaper:200402

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    Related research

    Keywords: euro area enlargement; euro adoption; convergence; Maastricht; European Union;

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    References

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    1. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR & CES & MSH, vol. 16(33), pages 433-462, October.
    2. Iikka Korhonen, 2002. "Some empirical tests on the integration of economic activity between the euro area and the accession countries," Macroeconomics 0209006, EconWPA.
    3. Jeffrey A. Frankel & Andrew K. Rose, 2000. "Estimating the Effect of Currency Unions on Trade and Output," NBER Working Papers 7857, National Bureau of Economic Research, Inc.
    4. James Harrigan & Egon Zakrajsek, 2000. "Factor Supplies and Specialization in the World Economy," NBER Working Papers 7848, National Bureau of Economic Research, Inc.
    5. International Monetary Fund, 2000. "Exchange Rate Regimes in Selected Advanced Transition Economies," IMF Policy Discussion Papers 00/3, International Monetary Fund.
    6. Volker Nitsch, 2002. "Honey, I Shrunk the Currency Union Effect on Trade," The World Economy, Wiley Blackwell, vol. 25(4), pages 457-474, 04.
    7. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
    8. Mojon, BenoƮt & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 0092, European Central Bank.
    9. Michael Frenkel & Christiane Nickel, 2002. "How Symmetric Are the Shocks and the Shock Adjustment Dynamics Between the Euro Area and Central and Eastern European Countries (CEEC)+L2572?," IMF Working Papers 02/222, International Monetary Fund.
    10. Andrew K. Rose, 2001. "Currency unions and trade: the effect is large," Economic Policy, CEPR & CES & MSH, vol. 16(33), pages 449-461, October.
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