Published: 01.01.2013


2003/3 Interest Rate Term Structure in Latvia in the Monetary Policy Context ( 2,26 MB)
Jelena Zubkova

This paper examines applicability of various models of the yield curve construction to the Latvian money and government securities markets, and analyses the information content implied in the yield curve. Rejection of the hypothesis about the existence of a zero risk premium leads to an inference that forward rates in general do not ensure unbiased forecasts of spot rates, and the pure interest rate expectations theory cannot be applied in interest rate forecasting. Long-term interest rates contain a risk premium that is other than zero. This conforms well to the results obtained from the studies conducted on the financial markets of developed countries.

Key words: term structure of interest rates, risk premium, the Nelson-Siegel model

JEL classification codes: D84, E43, E47, G10
2003/2 Measuring Output Gap in Latvia ( 772 KB)
Dainis Stikuts

To determine whether economic progress of a country presents a threat to its macroeconomic sustainability, the difference between actual and potential output is usually used in the formulation of the economic policy. A number of methodologies, including the time series method, HP filter approach and CD function, have been used in the estimation of potential GDP. Potential production factor values were calculated for the needs of the production function. The data used in the paper lead to an inference that the economic growth depends on increases in capital stock and technological progress, both contributing to labour productivity and offsetting workforce shrinkages.
Focusing on the relationship between output gap and inflation, this paper concludes that in Latvia, in contrast to several developed countries, the correlation between output gap and inflation is extremely weak due to the size and openness of the national economy as well as labour market inelasticity. Surveys conducted to date do not produce adequate data for an accurate estimation of the impact the output gap may have on inflation. Inflation is affected by a number of factors, e.g. Latvia's openness to imports, a relatively unlimited external supply of goods for relatively fixed prices, and administratively regulated prices, but it does not depend on the output gap. Hence the excessive demand is to be associated with a rise in imports rather than an upswing in inflation. Therefore, instead of inflation rate, it is the current account that reflects the domestic demand and its development trends more accurately.

Key words: output gap, potential output, production function, NAWRU

JEL classification codes: C13, E32
2003/1 Transmission of Monetary Shocks in Latvia ( 290 KB)
Martins Bitans, Dainis Stikuts, Ivars Tillers

This study deals with short-term reactions of the economy to various monetary shocks. The analysis of the financial system of Latvia supports the view that the wealth channel is currently very weak or even non-existent due to a relatively underdeveloped capital market. The importance of various channels of monetary transmission has been tested empirically by using the structural VAR model and small structural macroeconomic model. The analysis provides evidence that monetary shocks are transmitted to the economy mainly through the exchange rate channel.

Key words: monetary policy, monetary transmission mechanism, small structural model, vector autoregression

JEL classification codes: C32, C51, E52