Real Exchange Rate in Latvia (1994-2001)
The analysis of the exchange rate in Latvia presented in this publication covers a period from 1994 until 2001. The analysis has been based on two commonly used methods: the single equation approach and the macroeconomic balance approach. The existing fundamental variables in the economy warrant the exchange rate that is undervalued relative to its equilibrium. Therefore, the current exchange rate in Latvia generally corresponds to the current stage of economic development. The real appreciation of the exchange rate with respect to the countries of Western Europe is in line with the appreciation of the trend exchange rate, which is driven mainly by rising productivity in the tradable sector. Therefore, the appreciation of the real exchange rate from 1994 until 2001 has not generally harmed foreign trade. As long as real appreciation is supported by underlying fundamental variables in the economy, it does no endanger macroeconomic stability and growth.
Key words: real exchange rate, foreign trade
JEL classification codes: C20, E20, E52, F10