Abstract
In 2008, the Latvian economy experienced the strongest shock in the post-transition period. The repercussions of the shock have extended to all sectors of the economy and have impacted essentially all socio-economic groups of the population. The recovery took place under an unchanged currency peg and in circumstances where the government’s capacity to use fiscal stimulus was very limited, which left most burden of adjustment on the ability of labour and product markets to react flexibly. In a sense, in light of Latvia’s prospective eurozone membership, the recovery from the crisis provides a very useful insight into the effectiveness of adjustment mechanisms which will be available when the exchange rate instrument becomes unattainable.
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