Short-run lats rate movements: impact of foreign currency shocks via trade and financial markets

Martins Kazaks and Duo Qin
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Martins Kazaks: UCL School of Slavonic and East European Studies and Queen Mary, University of London

No 26, UCL SSEES Economics and Business working paper series from UCL School of Slavonic and East European Studies (SSEES)

Abstract: This paper investigates the short-run dynamic impact of foreign currency shocks on the deviations of Latvian lats vis-Ã -vis US dollar market spot rate from the parity set via lats' peg to SDR for the period from 1994 to 2000. The analysis is based on the standard theoretical model of dynamic cost adjustment, from which empirical models of the autoregressive distributed-lags form are derived. Reduction of several versions of such general models leads to a number of parsimonious and data congruent models. Our main findings from the modelling experiment are: Cross-currency shocks produce extensive impact on the net rate of lats, especially those shocks from the neighbouring transition economies, such as Estonia and Lithuania; These shocks may not be original, and may well act as transmission ports of other foreign currency shocks; The Russian crisis of August 1998 has exerted massive devaluation pressure on lats; The shocks are found to be transmittable via either trade and financial linkages, with the financial channel being the most contagious; Model configurations are found, however, neither unique nor definitely invariant, suggesting that it might be necessary to maintain several models in practice to fulfil different purposes in policy analyses and economic forecasting.

Keywords: exchange rate determination; currency shock transmission; trade linkages; financial market linkages; capital mobility; transition. (search for similar items in EconPapers)
JEL-codes: E44 E58 F31 F41 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2002-08
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Related works:
Working Paper: Short-run Lats Rate Movements: Impact of Foreign Currency Shocks via Trade and Financial Markets (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:see:wpaper:26

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