Answer to Question #105095 in Macroeconomics for Innocent Mudzari

Question

Critically evaluate the economic imbalances that Latvia experienced and recommend the policy options that could have been adopted in order to manage each of them

Answer 1

Latvia experienced a fast growth rate between 2000 and 2007 which led to the accumulation of internal and external imbalances including high rates of inflation and increase in foreign debt. The economic policies that should be adopted by Latvia to recover from this boom is a strategy called internal devaluation. This includes monitoring the fixed exchange rate and implementing pro-cyclical monetary and facial policies.