Pricing to market and Eurozone membership: Evidence from Latvia
Alberto Cavallo, Brent Neiman, Roberto Rigobon 22 August 2014
What happens to prices when a country joins a currency union, and do prices behave differently in a pegged exchange rate regime? This column sheds lights on these questions by using evidence from Latvia, whose currency was pegged to the euro before the country became a Eurozone member on 1 January 2014. The authors find that clothing retail prices in Latvia completely converged to those in other Eurozone countries.
What happens to prices when a country joins a currency union? And do prices behave differently in pegged exchange rate regimes compared to common currency areas? The answer to this question is a critical input to a country’s choice of currency regime.
Europe's nations and regions
eurozone, Latvia, pricing, currency membership
Lessons from Latvia
Olivier Blanchard 15 June 2012
Latvia was severely hit by the Global Crisis yet its adjustment has been remarkable. Four years after the hit it has one of the highest growth rates in Europe, its euro-peg has held, and the fiscal and current accounts are close to balance. This column outlines seven reasons why its adjustment has worked so well. It warns however that the lessons are not easily exportable.
In 2008 Latvia was widely seen as an economic basket case, a textbook example of a boom turned to bust.
From 2005 to 2007 average annual growth had exceeded 10% and the current-account deficit had increased to more than 20% of GDP. By early 2008 however, the boom had come to an end and, by the end of 2008, output was down by 10% from its peak, the fiscal deficit was shooting up, capital was leaving the country, and reserves were rapidly decreasing.
IMF, global crisis, Latvia
Growing together: Croatia and Latvia
Thorvaldur Gylfason, Eduard Hochreiter 08 December 2010
Croatia and Latvia both gained independence in the early 1990s. This column tracks their progress since. It shows that the two are growing but at different rates and with varying cycles. It argues that investment in human capital, good governance, and institutional reform have been vital for development and while Latvia is catching up, Croatia remains the more efficient and wealthier of the two.
Croatia and Latvia regained independence in the early 1990s. While Latvia could promptly start adjusting its policies to prepare for its integration into the EU (and NATO), Croatia suffered a bloody war of independence that, including its political aftermath, set its EU ambitions back by about a decade. Latvia used its time well and pursued radical reform policies that led to EU accession in 2004. After nearly five years of war, Croatia opted for more cautious, gradual reforms, and opening up.
Development Europe's nations and regions
Eastern Europe, Latvia, Croatia
Is Latvia the new Argentina?
Eduardo Levy Yeyati 22 June 2009
Latvia has been hard hit by the global crisis and faces an unsustainable currency peg. Should the country float its currency, adopt the euro, or try a contained devaluation? This column assesses the options and says that the latter is most realistic, in that it will address the concerns of the EU, IMF, and Latvia.
The strategy of engineering an “internal” depreciation under a peg in Latvia (via contractionary fiscal policy, wage cuts and price deflation) implicit in the IMF program (IMF 2009) is proving too painful, if not self-defeating as in the 2001 collapse of Argentina’s currency board (De La Torre et al 2003). While the economy (and the fiscal accounts) worsened more than expected, nominal depreciation in most trading partners led the Lat real effective exchange rate to appreciate 6% in the first quarter of 2009.
Europe's nations and regions
currency crisis, Latvia, euroisation