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Adjustment Under a Currency Peg; Estonia, Latvia and Lithuania During the Global Financial Crisis 2008-09

Author

Listed:
  • Catriona Purfield
  • Christoph B. Rosenberg

Abstract

The paper traces the Baltics’ adjustment strategy during the 2008-09 global financial crisis. The abrupt end to the externally-financed domestic demand boom triggered a severe output collapse, bringing per capita income levels back to 2005/06 levels. In response to this shock, the Baltics undertook an internal devaluation that relied on unprecedented fiscal and nominal wage adjustment, steps to preserve financial sector stability as well as complementary efforts to facilitate voluntary private debt restructuring. One-and-half years on, the strategy is making good progress but not yet complete. Confidence in the exchange rate was maintained, the banking system was supported by its parent banks, external imbalances and inflation have largely disappeared, competitiveness is improving, and fiscal deficits are gradually being brought back towards pre-crisis levels. However, amid record levels of unemployment, further reforms are needed to foster a return to more balanced growth, fiscal sustainability, and a healthier banking system.

Suggested Citation

  • Catriona Purfield & Christoph B. Rosenberg, 2010. "Adjustment Under a Currency Peg; Estonia, Latvia and Lithuania During the Global Financial Crisis 2008-09," IMF Working Papers 10/213, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/213
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    References listed on IDEAS

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    1. Jan Babecký & Philip Du Caju & Theodora Kosma & Martina Lawless & Julián Messina & Tairi Rõõm, 2010. "Downward Nominal and Real Wage Rigidity: Survey Evidence from European Firms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(4), pages 884-910, December.
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    Cited by:

    1. Arnold WEISZENBACHER, 2014. "Macroeconomic Stability Of Central And Eastern European Countries," EURINT, Centre for European Studies, Alexandru Ioan Cuza University, vol. 1, pages 263-278.
    2. Eddie Casey & Joe Durkan & David Duffy, 2013. "Fiscal Consolidation Strategies: Evidence from the International Experience," Open Access publications 10197/5999, School of Economics, University College Dublin.
    3. Anders åslund, 2012. "Is the catching- up process in Central and Eastern Europe sustainable?," Chapters,in: European Integration in a Global Economy, chapter 13, pages 129-146 Edward Elgar Publishing.
    4. Konstantīns Beņkovskis, 2012. "Competitiveness of Latvia's exporters," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 12(2), pages 17-45, December.
    5. repec:hal:journl:halshs-00565231 is not listed on IDEAS
    6. Olivier Blanchard & Mark Griffiths & Bertrand Gruss, 2013. "Boom, Bust, Recovery Forensics of the Latvia Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 325-388.
    7. Hasan Cömert & Esra Nur Uğurlu, 2015. "The Impacts of the 2008 Global Financial Crisis on Developing Countries: The Case of the 15 Most Affected Countries," ERC Working Papers 1509, ERC - Economic Research Center, Middle East Technical University, revised Oct 2015.
    8. Ivo Karilaid & Tõnn Talpsepp & Tarvo Vaarmets, 2014. "Implications of the liquidity crisis in the Baltic-Nordic region," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 14(1-2), pages 35-54, December.
    9. Bems, Rudolfs, 2014. "Intermediate inputs, external rebalancing and relative price adjustment," Journal of International Economics, Elsevier, vol. 94(2), pages 248-262.
    10. repec:spr:empeco:v:54:y:2018:i:3:d:10.1007_s00181-017-1256-z is not listed on IDEAS
    11. Brizga, Janis & Feng, Kuishuang & Hubacek, Klaus, 2014. "Drivers of greenhouse gas emissions in the Baltic States: A structural decomposition analysis," Ecological Economics, Elsevier, vol. 98(C), pages 22-28.
    12. Olivier Blanchard & Mark Griffiths & Bertrand Gruss, 2013. "Boom, Bust, Recovery: Forensics of the Latvia Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(2 (Fall)), pages 325-388.
    13. repec:pal:compes:v:59:y:2017:i:4:d:10.1057_s41294-017-0034-4 is not listed on IDEAS
    14. Syed Al-Helal Uddin, 2016. "Value-added Trade, Exchange Rate Pass-Through and Trade Elasticity: Revisiting the Trade Competitiveness," 2016 Papers pud11, Job Market Papers.
    15. repec:rfe:zbefri:v:35:y:2017:i:2:p:391-424 is not listed on IDEAS
    16. Bernadeta Baran, 2014. "Budgetary Discipline And Internal Devaluation – Estonian Method To Overcome The Crisis," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 9(2), pages 9-23, June.

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