Latvia Trapped in an Exchange Rate Peg
13 Pages Posted: 10 Apr 2013
Date Written: April 4, 2013
Abstract
CEEC-10, after the effort made to join the European Union, are now facing another challenge: replacing their national currencies with the euro. Each of them will have to take the entry test – the EU Maastricht convergence criteria. Recently, Baltic countries after a decade of spectacular economic growth experience inflation motivated problems. For countries having a currency board or fixed exchange rates high inflation may trigger a dangerous feedback between higher and higher growth and negative real interest rates. In 2007 Latvia was trapped in such a scenario. Latvian lat got very close to the weak end of the narrow fluctuation band for LVL/EUR. Latvijas Banka, however, immediately, took a set of measures that weakened the pressure on lat and were also aimed at lowering inflation and stabilizing the economic growth. So far the instruments used have been effective. Still, the threat persists.
Note: Downloadable document is in Polish.
Keywords: Latvia, exchange rate peg
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