Price Dynamics in Latvia - Experience and Future Prospects

1/2001

Abstract
The Latvian experience shows that the central bank's successful monetary policy, together with the government's prudent policies, helps to reduce inflation. Due to Latvia's small size and high degree of openness of its economy, the exchange rate plays a significant role in determining inflation in the country. The Bank of Latvia's interim objective - the stability of the exchange rate - has been the key to achieving and maintaining price stability. In light of the fact that many factors that determine inflation in Latvia are beyond the central bank's control, the pursuit of a strategy based on inflation targeting appears to be difficult.

Key words: monetary policy, inflation, Phillips curve

JEL classification codes: C13, E31