The Assessment of Natural Rate of Unemployment and Capacity Utilisation in Latvia

Working Paper 2/2009

Abstract
Inflation and its dynamics are among the most important indicators in the focus of such economic agents as producers, consumers, investors, and monetary and fiscal policy makers. Risks of high inflation or deflation enhance the need to profoundly investigate factors and causes that could underpin materialisation of such risks in the economy and to seek for steps to avert adverse effects of unwelcome inflationary dynamics. Optimal capacity utilisation is one of the ways to escape endogenous pressures that increase inflation or cause deflation.
The study pursues the aim to assess short-term relationships between the capacity utilisation rate and inflation. The authors have set a target to determine the capacity utilisation rate at which no pressure is exerted upon inflation and to show whether the capacity utilisation rate of the Latvian economy was an underlying factor that caused a rise in inflation after the EU accession.

Keywords: NAIRU, NAIRCU, Kalman filter

JEL codes: C51, E31, D24

Research published: Assessment of the natural rate of unemployment and capacity utilisation in Latvia. Baltic Journal of Economics, 2009, No. 9 (2), pp. 25-46. Available:
http://www.biceps.org/en/AssessmentOfTheNatural