Published: 04.04.2015


2009/4 Advantages of Fixed Exchange Rate Regime from a General Equilibrium Perspective ( 611 KB)
Viktors Ajevskis, Kristine Vitola

In this paper we estimate a small open economy DSGE model for Latvia following Lubik and Schorfheide (2007) using Bayesian methods. The estimates of the structural parameters fall within plausible ranges. Simulation results suggest that under inflation targeting inflation turns out to be more volatile than under the peg in the case of Latvia. Additional concern for output stabilisation accounts for lower inflation variability while it is still higher than under existing exchange rate regime with ±1% fluctuation bands. The model results therefore support the existing exchange rate policy.

Key words: DSGE, small open economy, exchange rate policy, Bayesian estimation

JEL classification codes: C11, C3, C51, D58, E58, F41
2009/3 Measuring Total Factor Productivity and Variable Factor Utilisation: Sector Approach, The Case of Latvia ( 1,22 MB)
Ludmila Fadejeva, Aleksejs Melihovs

This research constructs estimates of total factor productivity (TFP) growth for six sectors of the Latvian economy for the period 2000-2008, using a sectoral quarterly data set. Estimates are obtained by controlling for qualitative changes in production factors and assuming a mechanism for capturing changes in the utilisation of labour and capital. The paper delivers two main results. First, the use of indicators for labour and capital utilisation intensity allows for minimisation of fluctuations in the TFP measure and makes it less output growth dependent compared with the Solow residual approach. Second, the comparison of both methods shows that the estimate of the TFP growth obtained by the Solow residual approach might be undervalued for manufacturing, electricity, gas and water supply, wholesale and retail trade as well as hotels and restaurants, while overvalued for the growth in the transport, storage and communication sector of the Latvian economy.

Key words: Total Factor Productivity, Solow residual, factor utilisation

JEL classification codes: C22, D24
2009/2 The Assessment of Natural Rate of Unemployment and Capacity Utilisation in Latvia ( 511 KB)
Aleksejs Melihovs, Anna Zasova

Inflation and its dynamics are among the most important indicators in the focus of such economic agents as producers, consumers, investors, and monetary and fiscal policy makers. Risks of high inflation or deflation enhance the need to profoundly investigate factors and causes that could underpin materialisation of such risks in the economy and to seek for steps to avert adverse effects of unwelcome inflationary dynamics. Optimal capacity utilisation is one of the ways to escape endogenous pressures that increase inflation or cause deflation.
The study pursues the aim to assess short-term relationships between the capacity utilisation rate and inflation. The authors have set a target to determine the capacity utilisation rate at which no pressure is exerted upon inflation and to show whether the capacity utilisation rate of the Latvian economy was an underlying factor that caused a rise in inflation after the EU accession.

Key words: NAIRU, NAIRCU, Kalman filter

JEL classification codes: C51, E31, D24

Research published: Assessment of the natural rate of unemployment and capacity utilisation in Latvia. Baltic Journal of Economics, 2009, No. 9 (2), pp. 25-46. Available:
2009/1 A Convergence Model of the Term Structure of Interest Rates ( 415 KB)
Viktors Ajevskis, Kristine Vitola

This paper develops a convergence model of the term structure of interest rates in the context of entering the EMU. Compared with the other models developed so far in this field, our model specification ensures convergence of the domestic short-term interest rates to the euro area ones. We achieve this convergence by stating that the spread between the domestic and euro short-term interest rates follows the Brownian bridge process. We also develop an econometric counterpart of the theoretical model. To address the problem of nonstationarity and nonlinearity of the model, the extended Kalman filter for coefficient estimation is applied.

Key words: term structure of interest rates, the Brownian bridge, the EMU, nonlinear Kalman filter.

JEL classification codes: E43, F36, G12, G15

Research published: A Convergence Model of the Term Structure of Interest Rates. Review of Finance, 2008, pp. 1-21. Available: