Published: 22.03.2022

Latvijas Banka maintains and develops economic modelling tools in order to ensure high-quality and independent analytical vision of monetary and economic policy making.

Economic models are based on economic theory, and they are calibrated to the Latvian economic structure.

Models of Latvijas Banka are used on a regular basis to make macroeconomic projections, analyse current economic developments and evaluate economic policy proposals.  

STIP model

The short-term inflation projections (STIP) model is used by Latvijas Banka to forecast future inflation in Latvia and assess developments in various inflation components.

The STIP model exploits statistical correlations between the harmonised index of consumer prices and its major determinants, i.e. wages, global food prices and oil prices. The STIP model is an important tool used by Latvijas Banka in the forecasting process.

More about the STIP model

Bessonovs, Andrejs, Krasnopjorovs, Oļegs. Short-Term Inflation Projections Model and Its Assessment in Latvia : Working Paper, No. 1, 2020. [Riga]: Latvijas Banka, 2020.

Bessonovs, Andrejs, Krasnopjorovs, Oļegs. Short-Term Inflation Projections Model and Its Assessment in Latvia. Baltic Journal of Economics (2021).

Examples of STIP model usage

Bessonovs, Andrejs, Krasnopjorovs, Oļegs. How developments in global food commodity prices affect consumer prices in Latvia. Macroeconomics.lv , 2019. 

Bessonovs, Andrejs, Krasnopjorovs, Oļegs. Wage increases result in higher prices: Empirical investigation. Macroeconomics.lv , 2019.

Bessonovs, Andrejs, Krasnopjorovs, Oļegs. Oil price pass-through to consumer prices in Latvia. Macroeconomics.lv , 2019.

Regular model-based flash HICP estimates

Computable general equilibrium (CGE) model with the fiscal sector

The computable general equilibrium (CGE) model contains a detailed information on sectors and goods, taking account of the input-output relationships between various sectors of the economy.

Latvijas Banka uses the CGE model for analysing the direct and indirect effects of various macroeconomic developments and fiscal policy changes on the overall economy and selected sectors on a regular basis.

The current version of the model comprises 63 sectors and 63 goods using data from input-output as well as supply and demand tables for 2015. The number of equations in this model is close to 30 thousand.

Developing Latvia's CGE model, special attention was paid to the fiscal block: the model consists of the major government expenditure types and five revenue sources, including four major taxes such as the personal income tax, mandatory social security contributions, value added tax and excise tax.

Latvijas Banka has merged the EUROMOD and CGE models into a single CGE-EUROMOD model, which is used to analyse the impact of macroeconomic changes on income of various social groups as well as to assess the indirect effect of changes in taxes and benefits.

For further information about the computable general equilibrium (CGE) model, see Goluzins, Eduards, Beņkovskis, Konstantīns, Tkačevs Oļegs. CGE model with fiscal sector for Latvia : Working Paper, No. 1, 2016, [Riga]: Latvijas Banka, 2016.

Examples of CGE model usage

The impact of a further drop in wood prices on Latvia's economy. Macroeconomic Developments Report , Section 7.2, December, 2019 [Riga]: Latvijas Banka, 2019.

Zutis, Klāvs, Vilerts, Kārlis, Fadejeva, Ludmila. Three recipes to increase tax revenue. Makroekonomika.lv , 2019. Available only in Latvian.

Assessment of tax reform proposals. Makroekonomika.lv , 2017. Available only in Latvian.

Tax strategy 20/20. makroekonomika.lv , 2017. Available only in Latvian.

Russia's cargo traffic diverted from Latvian ports. Macroeconomic Developments Report , Section 8.2, December, 2016 [Riga]: Latvijas Banka, 2016. Available only in Latvian.

EUROMOD

EUROMOD is a European tax-benefit microsimulation model. It enables analysis of the changes in tax and benefit rules and calculates the effect these changes on disposable income of different social groups. Thus, EUROMOD is an appropriate tool to assess the effect of changes in taxes and benefits on income inequality and poverty rates.

The model has been developed and maintained by the Institute for Social and Economic Research at the University of Essex in cooperation with national expert teams. The Latvian national expert team is based at the Baltic International Centre for Economic Policy Studies (BICEPS). EUROMOD is a static model based on the data obtained from the survey on income and living conditions (EU-SILC). 

Latvijas Banka has merged the EUROMOD and CGE models into a single CGE-EUROMOD model, which is used to analyse the impact of macroeconomic changes on income of various social groups as well as to assess the indirect effect of changes in taxes and benefits.

More about the EUROMOD microsimulation model

Sutherland, Holly, Figari, Francesco. EUROMOD: the European Union tax-benefit microsimulation model. International Journal of Microsimulation , vol. 6, issue 1, 2013, pp. 4–26.

Pluta, Anna, Zasova, Anna. EUROMOD Country Report Latvia 2017–2020 . [European Commission], 2020.

Examples of EUROMOD usage

Fadejeva, Ludmila, Kalnbērziņa, Krista. Where is the unused human capital or inequality in Latvia. Makroekonomika.lv , 2020. Available only in Latvian.

Vilerts, Kārlis, Fadejeva, Ludmila. 500 euro per child and other options. Makroekonomika.lv , 2021. Available only in Latvian.

Zutis, Klāvs, Vilerts, Kārlis, Fadejeva, Ludmila. Three recipes to increase tax revenue. Makroekonomika.lv , 2019. Available only in Latvian.

The Cabinet of Ministers Order No. 657 "On the Plan to Improve the Minimum Income Support System in 2022–2024" of 17 September 2021 . Available only in Latvian.

Short-term models used to forecast Latvia's gross domestic product (GDP)

Latvijas Banka employs the following models to forecast GDP growth.

  • The barometer compiles information on approximately 60 monthly economic indicators having the highest correlation with the target (GDP) time series. The barometer utilised for tracking Latvia's economic activity adopts the similar framework developed for the KOF Swiss Economic Barometer (Abberger et al. (2014, 2017).
  • The dynamic factor model (DFM) is based on the Kalman filter. The DFM allows for simultaneous modelling of economic time series observed at different frequencies (quarterly and monthly). The model built for the use with Latvian data adopts the framework of the EuroSTING indicator of Camacho and Perez-Quiros (2010). Siliverstovs (2012, 2016) applies the same framework for modelling of the Swiss economy.
  • The suite of nowcasting models consists of several short-term econometric (bridge, factor and VAR) models. It is used to nowcast short-term economic activity.
  • LATIN economic activity indicator is obtained via the regularised multivariate direct  filter using 220 economic time series of the Latvian economy, and to a lesser extent, of the Lithuanian, Estonian and euro area economy.

Model-related publications

Abberger, Klaus, Graff, Michael, Siliverstovs, Boriss, Sturm, Jan-Egbert. Using Rule-Based Updating Procedures to Improve the Performance of Composite Indicators. Economic Modelling, vol. 68, issue C, 2017. Elsevier, 2017, pp. 127–144.

Abberger, Klaus, Graff, Michael, Siliverstovs, Boriss, Sturm, Jan-Egbert. The KOF Economic Barometer, Version 2014. KOF Working Papers, No. 353, 2014. KOF Swiss Economic Institute, ETH Zurich, 2014, 51 p.

Camacho, M. and Perez-Quiros, G. Introducing the Euro-STING: Short-term Indicator of Euro Area Growth. Journal of Applied Econometrics, vol. 25, issue 4, 2010, John Wiley & Sons, Ltd., 2010, pp. 663-694.

Siliverstovs, Boriss. The Franc Shock and Swiss GDP: How Long Does It Take to Start Feeling the Pain? Applied Economics, vol. 48, issue 36, March 2016. Taylor & Francis Journals, 2016, pp. 3432–3441.

Siliverstovs, Boriss. Are GDP Revisions Predictable? Evidence for Switzerland. Applied Economics Quarterly, vol. 58, No. 4, 2012. Duncker & Humblot GmbH, 2012, pp. 299–326.

Buss, Ginters. Real‐Time Signal Extraction with Regularized Multivariate Direct Filter Approach. Journal of Forecasting, vol. 35, issue 3, 2016, John Wiley & Sons, Ltd., 2016, pp. 206–216.

DSGE model for Latvia

The DSGE model for Latvia is a dynamic, stochastic general equilibrium model for Latvia as a small open economy in the euro area.

DSGE models are used by monetary, fiscal and macroprudential institutions to analyse policy scenarios, explain historical developments and carry out forecasting.

DSGE models are based on general equilibrium theory and microeconomic principles. Unlike real business cycle models, DSGE models include various (inter alia, price) frictions and market failures. Meanwhile, in contrast to CGE (computable general equilibrium) models, DSGE models are dynamic, and expectations of market participants play an important role in their results. In the wake of the global financial crisis, DSGE models were supplemented with financial market frictions. Currently, DSGE models represent the predominant type of structural models used in the theoretical economics literature and economic policy institutions.

On the fiscal DSGE model for Latvia

Bušs, Ginters, Grüning, Patrick. Fiscal DSGE Model for Latvia : Working Paper, No. 5, 2020. [Riga]:  Latvijas Banka, 2020. 60 p. .

On the fiscal DSGE model for Latvia (suitable for forecasting)

Bušs, Ginters. Wage Formation, Unemployment and Business Cycle in Latvia : Working Paper, No. 1, 2017. [Riga]: Latvijas Banka, 2017. 69 p. .

Buss, Ginters. Financial frictions in Latvia. Empirical Economics , vol. 51, issue 2, 2016. Springer, 2016, pp. 547–575. .

Buss, Ginters. Search-and-matching frictions and labor market dynamics in Latvia . Dynare Working Paper Series, No. 45, 2015. CEPREMAP, 2015. 74 p.

Examples of DSGE model usage

The government financial support provided during the second wave of the Covid-19 pandemic and its impact on the economy. Macroeconomic Developments Report , March, 2021 [Riga]: Latvijas Banka, 2021.

The reduction of the labour tax burden, Macroeconomic Developments Report, September, 2020 [Riga]: Latvijas Banka, 2020.

Vilerts, Kārlis, Rutkaste, Uldis, Bušs, Ginters. The time is ripe to reduce labour taxes. Makroekonomika.lv, 2020. Available only in Latvian.

Formulating a balanced budget. Macroeconomic Developments Report, June, 2019 [Riga]: Latvijas Banka, 2019.

Macroeconomic consequences of weak lending. Macroeconomic Developments Report, September, 2021 [Riga]: Latvijas Banka, 2021.

The impact of more subdued lending on the economy, Macroeconomic Developments Report, December, 2019, Latvijas Banka.

Kaužēns, Egils, Bušs, Ginters. My friend Eurosceptic has spent 4 years with €. Makroekonomika.lv , 2018. Available only in Latvian.

The fiscal impact of inequality measures. Macroeconomic Developments Report, December, 2018 [Riga]: Latvijas Banka, 2018.

Wages and salaries continue to rise faster than labour productivity. Macroeconomic Developments Report , December, 2017 [Riga]: Latvijas Banka, 2017.

Decline in housing prices in the Nordic countries. Macroeconomic Developments Report , December, 2017 [Riga]: Latvijas Banka, 2017.

Assessment of the tax reform proposal. Macroeconomic Developments Report , June, 2017 [Riga]: Latvijas Banka, 2017.

Brexit risk scenario. Macroeconomic Developments Report , December, 2016 [Riga]: Latvijas Banka, 2016.