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Europe > Latvia, Republic of

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Cover IMF Working Papers
Shocked: Electricity Price Volatility Spillovers in Europe
Serhan Cevik
and
Yueshu Zhao
European electricity markets are in the midst of unprecedented changes—caused by Russia’s invasion of Ukraine and the rise of renewable sources of energy. Using high-frequency data, this paper investigates volatility spillovers across 24 countries in the European Union (EU) during the period 2014–2024 to provide a better understanding of the transmission of risks in an international context. We develop both a static and a dynamic assessment of spillover effects and directional decomposition between individual countries. Our main findings show that about 73 percent of the forecast error variation is explained by cross-variance shares, which means only 27 percent can be attributed to shocks within each country. In other words, cross-border volatility spillovers dominate the behavior in national electricity markets in Europe—and this effect has grown over time. We also implement an augmented gravity model of bilateral volatility spillovers across power markets in the EU. Altogether, these results provide important insights to policymakers and regulators with regards to greater integration of electricity markets and infrastructure improvements that would also help with the transition to low-carbon sources of power generation and strengthen energy security in Europe.
Keywords:
Electricity prices; Volatility; Spillovers; Gravity model; Renewable energy; Electricity market reform; Europe; volatility spillover; spillover effect; markets in the EU; electricity market; Electricity; Gravity models
Cover IMF Staff Country Reports
Republic of Latvia: 2024 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
The 2024 Article IV Consultation highlights that the Latvian economy contracted with significant disinflation. Amid high uncertainty, growth is projected to rebound, but risks are tilted to the downside. Considering the improving outlook, the IMF Staff recommends a less expansionary, neutral fiscal stance for 2024 and a tighter fiscal stance in 2025. Although Latvia has some fiscal space, structural fiscal measures are needed to provide buffers for medium to long term spending pressures. Although the financial sector has so far been resilient, continued monitoring of macrofinancial vulnerabilities and spillovers is warranted. While the current macroprudential policy stance is broadly appropriate, the recent adjustment to the borrower-based measures for energy-efficient housing loans should be reconsidered. The overall policy stance strikes the right balance between maintaining financial stability and the need to extend credit to the economy. However, borrower-based macroprudential measures should be relaxed only when their presence is overly stringent from the financial stability perspective.
Keywords:
World Bank-International Monetary Fund mission; IMF-World Bank mission; audit committee charter; executive board assessment; anti-corruption plan; Labor markets; Productivity; Fiscal stance; Inflation; Baltics
Cover IMF Staff Country Reports
Kingdom of the Netherlands–The Netherlands: 2024 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
The 2024 Article IV Consultation discusses that the economy has cooled, but signs of overheating remain in The Netherlands. After two years of strong recovery, growth decelerated in 2023, reflecting the energy shock, tighter financial conditions, and a slowdown in key trading partners, particularly Germany. Core inflation remains elevated, reflecting a tight labor market, robust wage growth, and healthy profit margins. Growth is expected to gradually regain momentum in 2024, driven by higher private consumption and external demand. High interest rates will weigh on business and residential investment. For 2024, given the high cost of underestimating inflation persistence, a non-expansionary stance is warranted; adjustment measures should be identified. Medium-term fiscal challenges call for structural reforms to stabilize debt. Climate mitigation strategies need to tackle implicit fuel subsidies, striking the right balance among regulation, pricing/feebates, and subsidies, while addressing distributional concerns and ensuring policy predictability.
Keywords:
government Finance statistics yearbook; IMF staff calculation; core inflation persistence; EMU aggregate; consultation cycle; Labor markets; Inflation; Labor shortages; Fiscal stance; Europe
Cover IMF Working Papers
Is Inflation Good for Business? The Firm-Level Impact of Inflation Shocks in the Baltics, 1997-2021
Serhan Cevik
,
Alice Fan
, and
Sadhna Naik
Using a large panel of firm-level data, this paper provides an analysis of how inflation shocks in the Baltics between 1997 and 2021 affected total factor productivity (TFP), gross profitability, and net fixed investment in nonfinancial sectors. First, we find that inflation and inflation volatility had mixed effects on TFP growth, profitability and net fixed investment in the first year as well as over the medium term, albeit at a dissipating rate. Second, focusing on subsamples, we find that inflation shocks had differential effects on large versus small firms. Third, we explore sectoral heterogeneity in how firms responded to inflation shocks and observe significant variation across tradable and non-tradable sectors. Finally, estimates from a state-dependent model suggest that firms’ response to inflation shocks varied with the state of the economy. The results suggest that nonfinancial firms in the Baltics have been agile in adjusting to inflation shocks, possibly by either transferring higher production costs to consumers or substituting inputs. Given the differences in the level and nature of the recent inflation shock and the sample period on which our analysis is based, empirical findings presented in this paper might not necessarily apply to the latest bout of inflation in the Baltics.
Keywords:
Inflation; firm performance; productivity; profitability; fixed investment; Baltics; Estonia; Latvia; Lithuania; inflation shock; inflation volatility; IMF working paper No. 24/43; nonfinancial firm; impact of inflation; affected total factor productivity; Total factor productivity; Economic recession
Cover IMF Working Papers
Micro-Assessment of Macroprudential Borrower-Based Measures in Lithuania
Mantas Dirma
and
Jaunius Karmelavičius
Despite having introduced borrower-based measures (BBM), Lithuania's housing and mortgage markets were booming during the low-interest-rate period, casting doubt on the macroprudential toolkit's ability to contain excessive mortgage growth. This paper assesses the adequacy of BBMs’ parametrization in Lithuania. We do so by building a novel lifetime expected credit loss framework that is founded on actual loan-level default and household income data. We show that the BBM package effectively contains mortgage credit risk and that housing loans are more resilient to stress than in the preregulatory era. Our BBM limit calibration exercise reveals that (1) in the low-rate environment, income-based measures could have been tighter; and (2) borrowers taking out secondary mortgages rightly are and should be required to pledge a higher down payment.
Keywords:
macroprudential policy; borrower-based measures; LTV; mortgage credit risk; lifetime expected loss; probability of default.; calibration exercise; BBM package; modeling mortgage risk; Lithuania's housing market; Mortgages; Loans; Credit risk; Housing prices; Macroprudential policy instruments; Europe; Baltics; Global
Cover IMF Staff Country Reports
Republic of Latvia: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Latvia
International Monetary Fund. European Dept.
The 2023 Article IV Consultation highlights that Latvia is facing an inflation shock, slow growth, and geopolitical challenges. The government will have to continue to deal with the spillovers in the Baltic region from the Russian invasion of Ukraine and the impact of sanctions imposed on Russia and Belarus, the cost-of-living crisis, and energy security. These short-term concerns are adding to the long-term policy challenge of sustaining the income convergence process. Latvia’s income convergence has already been lagging the other Baltic countries. Amid high uncertainty, the balance of risks is tilted to the downside. The main risks stem from an escalation of the war and associated sanctions, which could result in renewed increases in energy prices, energy supply disruptions in Europe, and weaker external demand. Global financial conditions could further tighten, with spillovers to Latvian banks and domestic credit growth. The paper recommends that structural policies should facilitate the green transition, reduce skill shortages, and boost productivity.
Keywords:
income convergence; shock support measure; inflation shock; government finance statistics yearbook; inflation momentum; bank credit risk indicator; Inflation; Energy prices; Fiscal stance; Baltics; Europe
Cover IMF Working Papers
Far More Than a Shot in the Arm: Vaccines and Consumer Spending
Mr. Serhan Cevik
The spread of the COVID-19 pandemic and government interventions have reshaped economic activity with abrupt changes in household consumption behavior across the world. This paper provides an empirical investigation of how the COVID-19 vaccine rollout has affected consumer spending at daily frequency using debit and credit card transactions in three European countries. Empirical results show that COVID-19 vaccinations, along with other policy interventions, have mitigated the severe negative impact of the pandemic and boosted consumer spending. First, the vaccination deployment has a statistically and economically significant positive effect on private consumption. Second, other policy responses to the pandemic—designed to contain the spread of the virus and provide support to businesses and households—have significant effects on the amount and composition of debit and credit card transactions. Third, the impact of COVID-19 vaccinations in terms of stimulating consumer spending appears to be more pronounced on contact-intensive sectors such as services than goods.
Keywords:
Pandemic; COVID-19; vaccination; household behavior; consumer spending; card transactions; Baltics; Estonia; Latvia; Lithuania; vaccine rollout; credit card transactions; vaccination deployment; government intervention; vaccination effort; Consumer credit; Household consumption
Cover IMF Working Papers
Show Me the Money: Tracking Consumer Spending with Daily Card Transaction Data During the Pandemic
Mr. Serhan Cevik
The COVID-19 pandemic has been an unprecedented shock to economic activity with abrupt and unexpected changes in household consumption behavior. This paper investigates how the spread of the pandemic and government interventions have affected consumer spending using daily card transaction data in the Baltics. The analysis shows significant effects on the amount and composition of debit and credit card transactions. First, the number of new COVID-19 infections or deaths has a strongly negative effect. Second, while public health measures designed to contain the spread of the pandemic has a negative effect, economic support measures designed to assist businesses and households have a stimulative effect. Third, there is heterogeneity across spending categories, but the drop is mostly concentrated in sectors that are restricted by lockdowns and the risk of infection. Fourth, the impact of government interventions, especially in terms of stimulating consumer spending, appears to be more pronounced on goods than services.
Keywords:
Pandemic; consumer spending; card transactions; Baltics; Estonia; Latvia; Lithuania; euro area; transition economies; household consumption behavior; credit card transactions; stimulating consumer spending; government intervention; consumer spending pattern; credit card transaction data; COVID-19; Consumer credit; Consumption; Household consumption
Cover IMF Staff Country Reports
Republic of Latvia: 2022 Article IV Consultation-Press Release and Staff Report
International Monetary Fund. European Dept.
The economy fared relatively well during the pandemic, but the war in Ukraine is another major shock. The key vulnerabilities are Latvia’s significant reliance on imported gas from Russia until recently, the impact of high international energy prices on inflation and economic activity, and refugee inflows. Thus far, almost 33,000 refugees have entered Latvia. Parliamentary elections later this year may put pressure on the government budget.
Keywords:
government finance statistics yearbook; green transition goal; financial asset; supply bottleneck; wage-price spiral; government finance statistics database; price pressure; World Bank-International Monetary Fund mission; General government operation; Energy prices; Inflation; Income; Baltics; Global
Cover IMF Working Papers
The Direct Employment Impact of Public Investment
Marian Moszoro
We evaluate the direct employment effect of the public investment in key infrastructure—electricity, roads, schools and hospitals, and water and sanitation. Using rich firm-level panel data from 41 countries over 19 years, we estimate that US$1 million of public spending in infrastructure create 3–7 jobs in advanced economies, 10–17 jobs in emerging market economies, and 16–30 jobs in low-income developing countries. As a comparison, US$1 million public spending on R&D yields 5–11 jobs in R&D in OECD countries. Green investment and investment with a larger R&D component deliver higher employment effect. Overall, we estimate that one percent of global GDP in public investment can create more than seven million jobs worldwide through its direct employment effects alone.
Keywords:
employment effect; job content; employment impact; job elasticity; job intensity; construction employment; job multiplier; Public investment spending; Employment; Job creation; Income; Global