Econometric analysis and forecasting of Latvia's balance of payments

The main goal of the promotion paper is to forecast Latvia's current account, and using this forecast to define, whether the current account deficit is a significant risk factor for Latvian economy. The modelling of Latvia's current account is made by using econometric methodology, on the base of all the most important theoretical concepts of current account. Although the current account deficit is a risk factor for Latvian economy, it will not cause currency and financial crisis during the time period before Latvia's accession into the Economic and Monetary Union (EMU). The econometric models well describe Latvia's current account and its components. Developed current account models are suitable for macroeconomic analysis and forecasting.Latvia; current account; forecasting

The Role of Inflation Expectations in the New EU Member States: Consumer Survey Based Results

The objective of this paper is to analyze the link between inflation expectations and actual inflation in the New EU Member States (NMS). To achieve this goal, the results of a qualitative consumer survey were transformed into a quantitative measure of inflation expectations using the Carlson-Parkin approach. Afterwards, small-scale VAR models capturing actual inflation and inflation expectations were produced. Both the survey data and the quantified values of inflation expectations confirm that inflation expectations increased substantially prior to the NMS accession to the EU (in the case of Slovenia prior to accession to the EMU), with the expected inflation rate surging notably above the observed price increases. The findings of the VAR models indicate that inflation expectations have a positive impact on actual inflation in almost all the NMS; however, the potential problems of omitted variables and short sample period reduce the significance of this result.inflation expectations, survey data, VAR model

Econometric analysis and forecasting of Latvia's balance of payments

The main goal of the promotion paper is to forecast Latvia's current account, and using this forecast to define, whether the current account deficit is a significant risk factor for Latvian economy. The modelling of Latvia's current account is made by using econometric methodology, on the base of all the most important theoretical concepts of current account. Although the current account deficit is a risk factor for Latvian economy, it will not cause currency and financial crisis during the time period before Latvia's accession into the Economic and Monetary Union (EMU). The econometric models well describe Latvia's current account and its components. Developed current account models are suitable for macroeconomic analysis and forecasting

Econometric analysis and forecasting of Latvia's balance of payments

The main goal of the promotion paper is to forecast Latvia's current account, and using this forecast to define, whether the current account deficit is a significant risk factor for Latvian economy. The modelling of Latvia's current account is made by using econometric methodology, on the base of all the most important theoretical concepts of current account. Although the current account deficit is a risk factor for Latvian economy, it will not cause currency and financial crisis during the time period before Latvia's accession into the Economic and Monetary Union (EMU). The econometric models well describe Latvia's current account and its components. Developed current account models are suitable for macroeconomic analysis and forecasting

Assessing the sensitivity of inflation to economic activity

A number of academic studies suggest that from the mid-1990s onwards there were changes in the link between inflation and economic activity. However, it remains unclear the extent to which this phenomenon can be ascribed to a change in the structural relationship between inflation and output, as opposed to a change in the size and nature of the shocks hitting the economy. This paper uses a suite of models, such as time-varying VAR techniques, traditional macro models, as well as DSGE models, to investigate, for various European countries as well as for the euro area, the evolution of the link between inflation and resource utilization and its dependence on the nature and size of the shocks. Our analysis suggests that the relationship between inflation and activity has indeed been changing over time, while remaining positive, with the correlation peaking during recessions. Quantitatively, the link between output and inflation is found to be highly dependent on which type of shocks hit the economy: while, in general, all demand shocks to output imply a reaction of inflation of the same sign, the latter will be less pronounced when output fluctuations are driven by supply shocks. In addition, a sharp deceleration of activity, as opposed to a subdued but protracted slowdown, results in a swifter decline in inflation. Inflation exhibits a rather strong persistence, with a negative impact still visible three years after the initial shock. JEL Classification: E31, E32, E37demand shock, inflation response, Macro model, output growth, Phillips curve

Short-Term Forecasts of Latvia's Real Gross Domestic Product Growth Using Monthly Indicators

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

Is there a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data

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.monetary policy transmission, bank lending channel

LATCOIN: Determining Medium to Long-Run Tendencies of Economic Growth in Latvia in Real Time

This paper presents a method of estimating the current state of Latvia's economy. The evaluation object is medium to long-run growth of real GDP, but not actual GDP itself, which helps to filter out various one-off effects and focus on medium and long-run tendencies. Our indicator, called LATCOIN (Latvia's Business Cycle Coincidence Indicator), could be viewed as a simple adaptation of EUROCOIN for Latvia with some changes in methodology. LATCOIN is a monthly estimate of the medium to long-run growth of Latvia's real GDP, which is produced on the 9th working day of the next month. Using a large panel of macroeconomic variables, few smooth unobservable factors describing the economy are constructed. Further, these factors are used for the estimation of LATCOIN.Latvia's real GDP, band-pass filter, coincidence indicator, generalised principal components, real-time performance, turning points

The Effect of Latvian Pension Reform on Savings and Government Budget

This paper deals with pension reform’s effect on Latvian savings. We are studying the reaction of total savings and their components on change in the fully funded pillar’s share in the total pension system and on increase of the retirement age using overlapping generations model with many generations. The paper describes both the long-term and the short-term theoretical consequences of the changes in pension legislation. Finally, we evaluate the effect of Latvian pension reform on private savings, fully funded savings and government budget balance over the next 10 years. Model’s simulations show that the increase of the retirement age improves budget balance and total savings, while the introduction of the fully funded pensions redistributes the tax payments from the social budget to fully funded savings.Pension reform, overlapping generations model, savings

How Does Quality Impact on Import Prices?

Understanding the dynamics of import price developments is an important but challenging issue which affects the way we look on consumers' welfare, real exchange rates and exchange rate pass-through. In this paper we propose an exact import price index which extends the approach by Broda and Weinstein (2006) who adjust price developments for changes in varieties of imported products. We relax two assumptions still underlying the Broda and Weinstein (2006) approach, thus allowing the set of imported goods and the quality to vary. This variety-, set-of-products-, and quality-adjusted import price index shows that gains from variety in European G7 countries, although positive, are rather small compared to calculated gains from quality. Using HS 07 (vegetables) as our benchmark group of products with unchanged quality, we find significant gains from quality for Germany, France, Italy and the UK between 1995 and 2010. Although these results are not invariant to the choice of the benchmark category, they clearly stress the importance of incorporating the quality issues in empirical literature. Ignoring changes in import quality can give misleading estimates of import prices and consumers' welfare.import variety, price index, quality, welfare gains from trade