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Latvia’s Recession: The Cost of Adjustment With An “Internal Devaluation”

  • Mark Weisbrot
  • Rebecca Ray

The Latvian recession, which is now more than two years old, has seen a world-historical drop in GDP of more than 25 percent. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. This would make Latvia’s loss more than that of the U.S. Great Depression downturn of 1929-1933. This paper argues that the depth of the recession and the difficulty of recovery are attributable in large part to the decision to maintain the country’s overvalued fixed exchange rate, because it prevents the government from pursuing the policies necessary to restore economic growth.

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Paper provided by Center for Economic and Policy Research (CEPR) in its series CEPR Reports and Issue Briefs with number 2010-02.

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Length: 19 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:epo:papers:2010-02
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  1. Charles Calomiris, 2006. "Devaluation with Contract Redenomination in Argentina," NBER Working Papers 12644, National Bureau of Economic Research, Inc.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," NBER Working Papers 14656, National Bureau of Economic Research, Inc.
  3. Roberto Frenkel, 2007. "Argentina: The Central Bank in the Foreign Exchange Market," CEPR Reports and Issue Briefs 2007-03, Center for Economic and Policy Research (CEPR).
  4. Roberto Frenkel & Martín Rapetti, 2007. "Argentina's Monetary and Exchange Rate Policies after the Convertibility Regime Collapse," CEPR Reports and Issue Briefs 2007-12, Center for Economic and Policy Research (CEPR).
  5. Jose Antonio Cordero, 2009. "The IMF’s Stand-by Arrangements and the Economic Downturn in Eastern Europe: The Cases of Hungary, Latvia, and Ukraine," CEPR Reports and Issue Briefs 2009-31, Center for Economic and Policy Research (CEPR).
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