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Relationship Between Inflation and Economic Activity and Its Variation Over Time in Latvia

Author

Listed:
  • Andrejs Bessonovs

    (Bank of Latvia)

  • Olegs Tkacevs

    (Bank of Latvia)

Abstract

This paper studies the relationship between inflation and economic slack in Latvia with a particular focus on its time variation. The results suggest that the Phillips curve for Latvia had been steepening before the crisis against the backdrop of rising inflation. In the more recent years, there has been tentative evidence of the Phillips curve flattening as Latvia's economy entered a period of very low inflation. If the current trend of an even weaker response of inflation to economic activity in Latvia persists and proves to be statistically significant, unconventional monetary policy instruments may be of limited effectiveness to control inflation in Latvia. This calls for structural reforms aimed at increasing competition and reducing price stickiness.

Suggested Citation

  • Andrejs Bessonovs & Olegs Tkacevs, 2016. "Relationship Between Inflation and Economic Activity and Its Variation Over Time in Latvia," Working Papers 2016/03, Latvijas Banka.
    • Handle: RePEc:ltv:wpaper:201603
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    References listed on IDEAS

    as
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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