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Inflation in Latvia

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  • Trond-Arne Borgersen
  • Roswitha M. King

Abstract

This paper applies and extends the Scandinavian model of inflation for analyzing determinants of inflation in Latvia during the period 1996-2007. Until the outbreak of the financial crisis in 2007, high inflation was a persistent problem for advocates of Latvian participation in the Euro collaboration. By allowing for transitional effects and separating the impact of nominal and real factors on inflation, where real factors are related to the structural shifts at the heart of transition economies, we render the inflation history more understandable. We show that the effects accompanying real factors constitute the key component of overall inflation over the twelve-year period of observation, keeping nonstructural inflation below the Maastricht criteria for most of the period. The real contribution of real factors to inflation provides Latvia with better prospects for future growth and higher standards of living, and hence should be less worrisome than the nominal contribution. Still, when it comes to compliance with the Maastricht criteria, the Economic and Monetary Union makes no distinction between the two, complicating convergence for transition economies.

Suggested Citation

  • Trond-Arne Borgersen & Roswitha M. King, 2011. "Inflation in Latvia," Eastern European Economics, Taylor & Francis Journals, vol. 49(3), pages 26-53, May.
    • Handle: RePEc:mes:eaeuec:v:49:y:2011:i:3:p:26-53
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    References listed on IDEAS

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    1. Gérard Roland, 2004. "Transition and Economics: Politics, Markets, and Firms," MIT Press Books, The MIT Press, edition 1, volume 1, number 026268148x, December.
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    3. Konstantins Benkovskis & Daina Paula, 2007. "Inflation Expectations in Latvia: Consumer Survey Based Results," Working Papers 2007/01, Latvijas Banka.
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    7. Viktors Ajevskis, 2007. "Inflation and Inflation Uncertainty in Latvia," Working Papers 2007/04, Latvijas Banka.
    8. Egert, Balazs & Drine, Imed & Lommatzsch, Kirsten & Rault, Christophe, 2003. "The Balassa-Samuelson effect in Central and Eastern Europe: myth or reality?," Journal of Comparative Economics, Elsevier, vol. 31(3), pages 552-572, September.
    9. Alf Vanags & Morten Hansen, 2008. "Stagflation in Latvia: how long, how far, how deep?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 8(1), pages 5-28, October.
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    Cited by:

    1. Scott W. Hegerty, 2020. "Structural breaks and regional inflation convergence for five new Euro members," Economic Change and Restructuring, Springer, vol. 53(2), pages 219-239, May.
    2. Borgersen, Trond-Arne & King, Roswitha M., 2015. "Endogenous supply side constraints to export-led growth and aggregate growth implications in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 33(C), pages 96-109.
    3. Borgersen, Trond-Arne & King, Roswitha M., 2011. "Reallocation and restructuring: A generalization of the Balassa–Samuelson effect," Structural Change and Economic Dynamics, Elsevier, vol. 22(4), pages 287-298.

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