Impacts of macroeconomic policies on the Latvian output and policy implications

The author applies the IS-MP-IA model (Romer, 2000) to examine short run economic fluctuations for Latvia. The results show that equilibrium GDP is negatively associated with the expected inflation rate and the US federal funds rate and positively influenced by real depreciation and stock prices due to the wealth effect, Tobin's q theory, and the balance-sheet effect. The impact of the government deficit/GDP ratio on output is positive but insignificant.