2008-2010 in Latvia: some macroeconomic

issues revisited

Andrejs JakobsonsRiga Business School

Contents• Global Context• Some things that tended to be

forgotten in Latvia• What have we learned?• What happens next?

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)

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;

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?)

What Have We Learned? The key things:• policy interest rates and reserve requirements – very limited impact on the financial sector (small open economy);• 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 (the moral hazard issue needs to be addressed).

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”?

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

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

Thank you! Questions/comments are

welcome