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2008-2010 in Latvia: some macroeconomic issues revisited

2008-2010 in Latvia: some macroeconomic issues revisited. Andrejs Jakobsons Riga Business School. Contents. Global Context Some things that tended to be forgotten in Latvia What have we learned? What happens next?. Global Context.

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2008-2010 in Latvia: some macroeconomic issues revisited

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  1. 2008-2010 in Latvia: some macroeconomic issues revisited Andrejs Jakobsons Riga Business School

  2. Contents Global Context Some things that tended to be forgotten in Latvia What have we learned? What happens next?

  3. Global Context Rethinking Macroeconomic Policy (a 2010 paper by IMF: Olivier Blanchard, Giovanni Dell’Ariccia, Paolo Mauro) Key conclusions: - stable output gap and stable inflation still the main policy goals - however, more indicators need to be monitored (structure of output, asset prices etc.) - the importance of financial regulation - better automatic stabilizers (triggers based on macro variables)

  4. Some Things that Tended to be Forgotten… …during the rapid growth period in Latvia (1) no effective tools to control inflation in a small open economy with a fixed exchange rate; external debt - extremely important, but not just the public debt (contingent liabilities); investment/financing inflows are not guaranteed;

  5. Some Things that Tended to be Forgotten… …during the rapid growth period in Latvia (2) rapid growth should not be taken for granted; automatic stabilizers – were they adequately designed given the fiscal constraints? the role of expectations (how to manage them?)

  6. What Have We Learned? Thekeythings: policy interest rates and reserve requirements – very limited impact on the financialsector (smallopeneconomy); accumulate more resources during the good times; focus on the long-run aggregate supply – technological advance, skilled labor (both qualitative); labor force (quantitative); financial sector implications (themoralhazardissueneeds to beaddressed).

  7. What Happens Next? The proclaimed solution: Entry into the Eurozone in 2014 The criteria are well-known Inflation Budget Deficit Public Debt Interest Rates Constraints/conflicts Is it a “Mission Impossible”? Or maybe it is “Apollo 13”?

  8. What Happens Next? Apollo 13 (a quick reminder/analogy)

  9. What Happens Next? What if we miss the target? Oh, by the way – the Apollo 13 did get back to the Earth, but the initial goals were abandoned

  10. Thank you! Questions/comments are welcome

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