The aim of this study is to estimate the equilibrium REER of Latvia, which was done by using different methodologies, including IMF CGER approach, and the NATREX and SVAR models. The IMF methodology implies the application of three different methods: the macroeconomic balance method, the...

This paper presents a method to construct a sequence of approximate policy functions of increasing accuracy on non-local domains. The method is based upon the notion of stable manifold originated from dynamical systems theory. The approximate policy functions are constructed employing the...

The paper is a generalisation of L. E. O. Svensson's simplest test of target zone credibility and the drift-adjustment method in the context of anticipated planned repegging. In 1994, the Latvian lats was pegged to the SDR basket of currencies but on 30 December 2004 the lats was pegged to the...

The severe repercussions of the latest financial crisis highlighted the crucial role of the financial sector in the propagation of economic and financial shocks. In this paper we analyse the role of financial market frictions in business cycle fluctuations and in the transmission of monetary...

This study aims to generalize the Krugman target zone model for the case of terminal condition of joining a currency area. Using the terminal condition and the 'smooth pasting conditions', both analytical and numerical solutions of the problem are obtained. The proposed model is more adequate...

This paper develops a convergence model of the term structure of interest rates in context of entering the European Monetary Union (EMU). Compared to other models developed so far in this field, our model specification ensures convergence of the domestic short-term interest rates to the euro...

This paper studies various approaches to the equilibrium real effective exchange rate estimation, including structural and direct estimation approaches. It shows their strengths and weaknesses with application to the case of Latvia. Despite the approaches differing considerably in terms of their...

This study is devoted to examing marginal effects of traditional determinants of exports and imports with a focus on the role of price competitiveness in restoring external balances. It is a first attempt to compare marginal effects of various harmonised competitiveness indicators (HCIs) on both...

We propose an export price indicator adjusted for non-price factors as a measure of a country's competitiveness. Based on the approach by Broda and Weinstein (2006) who adjust price developments for changes in varieties of imported products, we relax their assumption of unchanged quality over...