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BPEA Article

Boom, Bust, Recovery: Forensics of the Latvia Crisis

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Abstract

In spite of the fact that Latvia is a small country, it has been an object of intense attention during the financial crisis because of the economic policies it put in place to get its economy back on track. By maintaining its currency peg, adjusting through internal devaluation and front loading fiscal austerity, this nation of 2 million is now, 5 years later, back on a strong economic footing, although it may have been quite painful to get there. Latvian policymakers, like those elsewhere, reacted too late to the boom, had good relations with parent banks; avoided a large decline in output thanks to deviations from strict currency board rules; had quick productivity gains; and for political purposes, output growth may matter as much or more than its level. In addition, the authors believe the case for Latvia joining the EU is a strong one, perhaps more so than for some of the existing members.

In spite of the fact that Latvia is a small country, it has been an object of intense attention during the financial crisis because of the economic policies it put in place to get its economy back on track. By maintaining its currency peg, adjusting through internal devaluation and front loading fiscal austerity, this nation of 2 million is now, 5 years later, back on a strong economic footing, although it may have been quite painful to get there. Latvian policymakers, like those elsewhere, reacted too late to the boom, had good relations with parent banks; avoided a large decline in output thanks to deviations from strict currency board rules; had quick productivity gains; and for political purposes, output growth may matter as much or more than its level. In addition, the authors believe the case for Latvia joining the EU is a strong one, perhaps more so than for some of the existing members.

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