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The Assessment of Natural Rate of Unemployment and Capacity Utilisation in Latvia

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  • Aleksejs Melihovs
  • Anna Zasova

Abstract

Inflation and its dynamics are among the most important indicators in the focus of such economic agents as producers, consumers, investors, and monetary and fiscal policy makers. Risks of high inflation or deflation enhance the need to profoundly investigate factors and causes that could underpin materialisation of such risks in the economy and to seek for steps to avert adverse effects of unwelcome inflationary dynamics. Optimal capacity utilisation is one of the ways to escape endogenous pressures that increase inflation or cause deflation. The study pursues the aim to assess short-term relationships between the capacity utilisation rate and inflation. The authors have set a target to determine the capacity utilisation rate at which no pressure is exerted upon inflation and to show whether the capacity utilisation rate of the Latvian economy was an underlying factor that caused a rise in inflation after the EU accession.

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Bibliographic Info

Paper provided by Latvijas Banka in its series Working Papers with number 2009/02.

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Date of creation: 28 Jul 2009
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Handle: RePEc:ltv:wpaper:200902

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Keywords: NAIRU; NAIRCU; Kalman filter;

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  1. Bianchi, Marco & Zoega, Gylfi, 1995. "Unemployment Persistence : Does the Size of the Shock Matter ?," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1995014, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  3. Camille Logeay & Silke Tober, 2003. "Time-Varying Nairu and Real Interest Rates in the Euro Area," Economics Working Papers 024, European Network of Economic Policy Research Institutes.
  4. Jørgen Elmeskov, 1993. "High and Persistent Unemployment: Assessment of the Problem and Its Causes," OECD Economics Department Working Papers 132, OECD Publishing.
  5. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," NBER Working Papers 8940, National Bureau of Economic Research, Inc.
  6. Laurence Boone & Claude Giorno & Mara Meacci & Dave Rae & Pete Richardson & Dave Turner, 2001. "Estimating the structural rate of unemployment for the OECD countries," OECD Economic Studies, OECD Publishing, vol. 2001(2), pages 171-216.
  7. Llaudes, Ricardo, 2005. "The Phillips curve and long-term unemployment," Working Paper Series 0441, European Central Bank.
  8. Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
  9. Aleksejs Melihovs & Anna Zasova, 2007. "Estimation of the Phillips Curve for Latvia," Working Papers 2007/03, Latvijas Banka.
  10. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
  11. Martins Bitans & Dace Slakota & Ivars Tillers, 2001. "Price Dynamics in Latvia - Experience and Future Prospects," Working Papers 2001/01, Latvijas Banka.
  12. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
  13. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  14. Nienke Oomes & Oksana Dynnikova, 2006. "The Utilization-Adjusted Output Gap," IMF Working Papers 06/68, International Monetary Fund.
  15. James K. Galbraith, 1997. "Time to Ditch the NAIRU," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 93-108, Winter.
  16. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.
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Cited by:
  1. Agnese Bicevska & Aleksejs Melihovs & Krista Kalnberzina, 2009. "Savings in Latvia," Discussion Papers 2009/01, Latvijas Banka.
  2. Farzana Shaheen & Azad Haider & Sajid Amin Javed, 2011. "Estimating Pakistan’s Time Varying Non-Accelerating Inflation Rate of Unemployment: An Unobserved Component Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 1(4), pages 172-179.

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