Published: 04.04.2015


2008/5 Short-Term Forecasts of Latvia's Real Gross Domestic Product Growth Using Monthly Indicators ( 697 KB)
Konstantins Benkovskis

The conjunctural information from monthly indicators, e.g. industrial production, retail trade turnover, M3, confidence indicators, etc. could partly replace GDP data before the first official release is published. It is possible to incorporate monthly indicators into short-term forecasting models of GDP using quarterly bridge equations or state space models. In many cases monthly indicators are released with a lag, and GDP forecasts based on actual figures are available only shortly before the official release. To eliminate this drawback, missing observations of monthly indicators could be forecasted using simple univariate time-series models.
To perform real-time analysis of the forecasting performance of bridge equations and state space models, a real-time database containing real GDP series with 28 vintages of quarterly real GDP was created.
According to calculations, only bridge equations and state space models containing M3 monthly data perform better than the benchmark ARIMA model. Both model types using M3 provide valuable information forecast for the first and final releases of GDP. This does not mean, however, that other conjunctural indicators should not be used in forecasting, as the analysis does not take into account possible future changes in links between monthly indicators and quarterly GDP growth.

Key words: bridge equations, state space model, out-of-sample forecasting, real-time database, interpolation.

JEL classification: C22, C53, E37
2008/4 Structural Transformation of Exports in a Product Space Model ( 319 KB)
Kristine Vitola, Gundars Davidsons

The research paper deals with an export structural transformation model providing for a transition from the production and exports of goods with low value added to the production and exports of goods with high value added. It is essential for the improvement of a nation's welfare, as observations show that in a longer perspective the level of economic development is related to the degree of export sophistication. The speed of structural transformation depends on the distance in the product space between the potential export goods and the existing export goods with revealed comparative advantage. Estimations within the research suggest that the relative distance of Latvian export goods to goods with comparative advantage is rather small. Potential of almost all groups of currently produced goods to act as drivers of development has already been exhausted to a large extent. In order to enhance sophistication of Latvia's export structure, the production of goods with their implicit income level exceeding the current average weighted value of the export basket should be augmented. Potential goods for exports include pharmaceutical products, medical, precision and optical instruments as well as chemicals and chemical products. However, it is rather unlikely that comparative advantage in these products can be developed without extra supportive measures taken by the Government.

Keywords: structural transformation, comparative advantage, export sophistication

JEL classification: F14, F19, O33, O40

2008/3 The Baltic States and Europe: Common Factors of Economic Activity ( 751 KB)
Ludmila Fadejeva, Aleksejs Melihovs

This paper aims at characterising fluctuations of economic activity that are common for the Baltic States, CEE countries, euro area countries and Russia. The real standardised GDP quarterly growth is chosen as an indicator of economic development of the countries. Three methods are employed: static factor analysis, dynamic factor model and dynamic correlation. Special attention is given to the analysis of Latvian economy.
The results of the study show that the Baltic economies are similar in economic development and share a common factor. After 2000, the real standardised GDP growth in the Baltic States became more correlated with the GDP growth of the main euro area countries indicating growing synchronisation of economic development between these country groups.
The role of the main final demand components (exports, consumption and investment) in explaining common fluctuations in the real standardised GDP growth in the Baltic States is evaluated by analysing common factors for each component and dynamic correlation between components for each country.

Keywords: business cycle synchronisation, dynamic factor model, dynamic correlation

JEL classification: E32, F20, C10

Research published: The Baltic States and Europe: Common Factors of Economic Activity. Baltic Journal of Economics, 2008, No. 8 (1), pp. 75-96. Available:
2008/2 Dynamic Factor Models in Forecasting Latvia's Gross Domestic Product ( 655 KB)
Viktors Ajevskis, Gundars Davidsons

The study aims at evaluating how useful the application of models using large panels of data in forecasting Latvia's GDP is. Two factor models have been used: the Stock-Watson factor model and the generalised dynamic factor model. The forecast findings by the two models have been compared with the results obtained by the benchmark autoregressive model. The results suggest that compared with simpler autoregressive models both the Stock-Watson factor model and the generalised dynamic factor model ensure forecast improvement, which, however, has not been statistically significant if statistical tests are used.

Keywords: forecasting, factor models, large cross section

JEL classification: C32, C33, C53
2008/1 Is there a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data ( 480 KB)
Konstantins Benkovskis

The goal of this paper is to explore the role of the banking sector in transmission of the Bank of Latvia's monetary policy and to check the existence of the bank lending channel in Latvia. For empirical investigation of the bank lending channel in Latvia, we use the approach that builds on the standard panel regression. The evidence on the bank lending channel is obtained by estimating a bank loan function that takes into account not only the monetary policy indicator and macroeconomic variables, but also bank-specific differences in the lending reaction to monetary policy actions.
Empirical analysis shows that some banks in Latvia have statistically significant negative reaction to a domestic monetary shock; however, the weighted average reaction of the total lats loan growth is not statistically significant. A domestic monetary shock has only a distribution effect and affects banks that are small, domestically owned and have lower liquidity or capitalisation. The bank lending channel is limited only for the supply of lats loans, which dramatically reduces the importance of this channel.

Keywords: monetary policy transmission, bank lending channel

JEL classification: C23, E52, G21