Published: 01.01.2013


2004/4 Pass-Through of Exchange Rates to Domestic Prices in East European Countries and the Role of Economic Enviroment ( 699 KB)
Martins Bitans

The paper examines the exchange rate pass-through in a set of 13 East European countries during the period of 1993-2003. The pass-through estimates are derived from a recursive VAR model in first differences, and the impact of exchange rate changes on both the producer and the consumer prices is studied. The estimates obtained for two sub-sample periods generally show an incomplete pass-through over a two-year horizon. In addition, the results imply a considerable cross-country variation and suggest that a significant decline (by nearly 50%) in the pass-through is possible over time. In particular, it is found that the exchange rate pass-through in East European countries is positively and statistically significantly related to the average inflation rate and the degree of exchange rate persistence. Moreover, the results confirm the existence of strong relationship between the pass-through and changes of the import structure. Finally, there is some limited evidence that the magnitude of the exchange rate pass-through might be positively related to the degree of openness to foreign trade of a country.

Key words: pass-through of exchange rate, recursive VAR model, Exchange Rate Mechanism II

JEL classification codes: C32, E31, E52
2004/3 Money Demand in Latvia ( 718 KB)
Ivars Tillers

The econometric analysis of the demand for broad money in Latvia suggests a stable relationship of money demand. The analysis of parameter exogeneity indicates that the equilibrium adjustment is driven solely by the changes in the amount of money. The demand for money in Latvia is characterised by relatively high income elasticity typical for the economy in a monetary expansion phase. Due to stability, close fit of the money demand function and rapid equilibrium adjustment, broad money aggregates can be used as indicators of the economic activity.

Key words: money demand, co-integration, exogeneity, vector error correction

JEL classification codes: C22, C32, E41
2004/2 Impact of the Euro Adoption on the Economy of Latvia ( 1,02 MB)
Martins Bitans, Egils Kauzens

In the past decade, Latvia's macroeconomic structure and the financial system have undergone momentous and radical changes, and the experience gained so far supports the assumption that the economy has been able to adjust effectively to changes in external environment. The calculations based on the gravity model analysis demonstrate that over longer horizons Latvia's GDP might be up to 19% higher than under a hypothetical scenario of Latvia preserving its national currency. Several indicators of the national structural development (structural changes of GDP sectors, structure of foreign trade broken down by trade partner and main commodity group, etc.) and the analysis of cyclical economic volatility show that in terms of real convergence Latvia often differs substantially from large euro area countries and only on few occasions Latvia's respective indicators display close similarity to the indicators of countries known as the periphery. It does not necessarily imply that along with the euro adoption the impact and periodicity of asymmetric shocks in Latvia are going to increase.

Key words: euro area enlargement, euro adoption, convergence, Maastricht, EU

JEL classification codes: E42, E58, F33, F42
2004/1 Foreign Exchange and Money Markets in the Context of the Exchange Rate Target Zone ( 984 KB)
Viktors Ajevskis, Armands Pogulis, Gunars Berzins

The paper has assessed market participants' confidence in the national currency of Latvia in the period between January 2001 and April 2003 using as the basis the position of the lats interest rates within the interest rate corridor. For the purpose of the study, the method of Lars E. O. Svensson was modified taking into account quoted interest rates and exchange rates as well as using the simple interest rate calculation. For the term of up to 1 year, arbitrage opportunities in Latvia's foreign exchange and money markets, likely to arise from the absence of money market participants' confidence in the existing foreign exchange corridor, have not been observed. The assessment of Latvia's money market participants does not signal any realignment possibility for the foreign exchange regime within the coming year.

Key words: exchange rate target zone, credibility, market interest rate, arbitrage opportunities

JEL classification codes: D84, E43, E58, F31, G15