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Economic adjustment in the Baltic Countries

  • Ardo Hansson
  • Martti Randveer

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    Estonia, Latvia and Lithuania stand out for their rapid economic adjustment after the outbreak of the global financial crisis. The reduction of imbalances and vulnerabilities in the Baltic countries has been much faster than that in the euro area countries most affected by the debt crisis. Our analysis seeks to explain these developments by addressing the following questions. First, what explains the recent cyclical pattern of the Baltic economies? Second, what are the similarities and differences between the economic adjustment in the Baltics and that in the euro area countries most affected by the recent debt crisis? And, finally, how successful has the strategy of adjustment been in the Baltic countries? We argue that the primary driving force of the cyclical developments in the Baltic economies has been the change in capital flows. A comparison of the economic adjustment in the Baltic countries with that in the three euro area countries strongly affected by the debt crisis – Ireland, Greece and Portugal – suggests that the main determinant of the speed of adjustment has been the ability of the countries to mitigate the impact of the sudden stop in private sector capital flows. Looking at the pros and cons of rapid and gradual adjustment, we conclude that in the case of the Baltic countries, the strategy of rapid adjustment has overall been a successful response to a very difficult situation

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    Paper provided by Bank of Estonia in its series Bank of Estonia Working Papers with number wp2013-1.

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    Date of creation: 23 Apr 2013
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    Handle: RePEc:eea:boewps:wp2013-1
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    1. Mark Aguiar & Gita Gopinath, 2004. "Emerging market business cycles: the cycle is the trend," Working Papers 04-4, Federal Reserve Bank of Boston.
    2. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    3. Zuzana Brixiova & Laura Vartia & Andreas Woergoetter, 2009. "Capital Inflows, Household Debt And The Boom Bust Cycle In Estonia," William Davidson Institute Working Papers Series wp965, William Davidson Institute at the University of Michigan.
    4. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
    5. Sonsoles Gallego & Sándor Gardó & Reiner Martin & Luis Molina & José María Serena, 2010. "The Impact of the Global Economic and Financial Crisis on Central Eastern and SouthEastern Europe (CESEE) and Latin America," Banco de Espa�a Occasional Papers 1002, Banco de Espa�a.
    6. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
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