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Megan Phipps
Megan Phipps
10/09/10
Mr.Polis
Inflation in Latvia: Causes, consequences, and the Government Response.
Inflation is defined as the increase in the amount of money and credit in relation to the supply of goods and services. It is a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency. Basically, everything becomes more valuable except money.
Latvian Inflation: The cause for Latvia’s high inflation is mainly dependent on the currency rates. The Euro has become more valuable, leaving the Lat to decrease in value. Also, the growth rates are high in the Baltics leading to high inflation. Unfortunately because the inflation is so high it has prevented the growth to stay high. Latvia is a transition country because it such a young independent country and a big part of the inflation is related to the affects of this transition and their privatization policy that was introduced in the 90’s. Each sector of Latvia’s economy is going through an uneven price growth which goes hand in hand with structural inflation.
Consequences: The higher tariffs on heat energy and other fuel for repair services affected the costs of maintenance of housing. There has been a ‘lagged’ effect of the rise in energy resource prices. Primary goods are getting more expensive in the domestic market. Fortunately, transportation and communication costs have recently decreased. Overheating has increased causing higher price and wage inflation, a larger account deficit and higher internal indebtedness. The growth in the euro currency rates has lead to a huge boom in the housing prices .
Government Response: The Government response to the high inflation is creating the anti-inflation plan and this plan consists of five general ideas. The short-term policies consist of budget policy, real estate taxation and measures to dampen the credit boom. The medium-term polices are aimed at labour market productivity, energy efficiency and increased competition. The measures aimed at the real estate market are beginning to be diluted and announced credit measures are trying to be effectively imposed. If fiscal consolidation and credit restrictions are imposed then this will help create and ‘internal balance’. This will help Latvia bounce back to the satisfactory level of inflation. The Latvian government is trying to maintain a balanced budget because of the deficit, to have better control over energy prices and to try to increase productivity. Much of this is part of a long-term plan.
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