Published: 04.04.2015


2010/3 Asset Prices and Financial Frictions in Monetary Transmission: The Case of Latvia
( 1.52 MB)
Kristine Vitola, Ludmila Fadejeva

The purpose of this paper is to quantify the role of financial frictions in Latvia's monetary transmission. Our model extends M. Iacoviello (9) framework along three dimensions. First, we introduce open-economy features by allowing imports of foreign consumer goods and borrowing from abroad. Second, we relax the assumption of fixed housing stock, allowing for investment. Finally, we assume a risk premium on foreign borrowing, which depends on net foreign asset position. We estimate the model by Bayesian approach and compare impulse responses to shocks under various scenarios. In addition to the baseline scenario, we explore the importance of tighter borrowing constraints and higher foreign risk premium elasticity in the model dynamics. Our findings show that tighter credit constraints weaken the transmission of shocks to housing demand and consumption. In the case of foreign interest rate and risk premium shocks, higher risk premium elasticity lessens the effect of monetary transmission on the domestic economy through higher cost of external funds.

Keywords: financial frictions, monetary transmission, asset prices, DSGE model, Bayesian approach

JEL classification: C11, E32, E44, E52, R21
2010/2 Quality and Variety of Exports from the New EU Member States: Evidence from Very Disaggregated Data ( 432 KB)
Konstantīns Beņkovskis, Ramune Rimgailaite

According to trade theories, the average quantity of exported goods is not the only parameter of export performance – the variety and quality of exports also play an important role. The goal of this paper is to evaluate the variety and quality of exports from the new EU Member States Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia (NMS) in 1999–2009. The analysis is done on the basis of methodology proposed by R. C. Feenstra (7) and further developed by D. Hummels and P. Klenow (13), and Ch. Broda and D. E. Weinstein (4). Although unit values play an important role in defining export quality, the calculations herein take into account also market shares and the level of monopoly power of firms in a particular market. In addition, this study contributes to the existing literature by providing a different way of evaluating the variety assuming that the number of exported brands follows the Poisson distribution. The calculations show that exports from NMSs in 2009 were of lower quality in comparison with German exports: relative quality was ranging between 0.30 and 0.55. It was found that all NMSs significantly increased their average number of brands exported to the EU market; moreover, all NMSs were able to increase the average quality of their exports during the 10-year reference period. Finally, relative quality is much more stable than relative prices, providing evidence that the measure of relative quality developed herein is better than the traditional proxy, i.e. relative export prices, as it does not include relative costs of production but reflects structural factors.

Keywords: new EU Member States, exports, quality, variety

JEL classification: C43, F12, F14, O52
2010/1 LATCOIN: Determining Medium to Long-Run Tendencies of Economic Growth in Latvia in Real Time ( 355 KB)
Konstantins Benkovskis

This paper presents a method of estimating the current state of Latvia's economy. The evaluation object is medium to long-run growth of real GDP, but not actual GDP itself, which helps to filter out various one-off effects and focus on medium and long-run tendencies. Our indicator, called LATCOIN (Latvia's Business Cycle Coincidence Indicator), could be viewed as a simple adaptation of EUROCOIN for Latvia with some changes in methodology. LATCOIN is a monthly estimate of the medium to long-run growth of Latvia's real GDP, which is produced on the 9th working day of the next month. Using a large panel of macroeconomic variables, few smooth unobservable factors describing the economy are constructed. Further, these factors are used for the estimation of LATCOIN.

Keywords: Latvia's real GDP, band-pass filter, coincidence indicator, generalised principal components, real-time performance, turning points

JEL classification codes: C22, C50, E32