Real Exchange Rate in Latvia (1994-2001)

The analysis of the exchange rate in Latvia presented in this publication covers the period from 1994 until 2001. The analysis has been based on two commonly used methods: the single equation approach and 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 West European countries 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 to 2001 has not generally harmed foreign trade. As long as real appreciation is supported by underlying fundamental variables in the economy, it does not endanger the macroeconomic stability and growth.