Labor Market Implications of Switching the Currency Peg in a General Equilibrium Model for Lithuania
On February 2, 2002, Lithuania switched its currency anchor from the dollar to the euro. While pegging to the dollar (since April 1994) has proven successful throughout the transition years, the recent decision to peg to the euro was motivated by t...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2002/04/1775829/labor-market-implications-switching-currency-peg-general-equilibrium-model-lithuania http://hdl.handle.net/10986/14286 |
| Summary: | On February 2, 2002, Lithuania switched
its currency anchor from the dollar to the euro. While
pegging to the dollar (since April 1994) has proven
successful throughout the transition years, the recent
decision to peg to the euro was motivated by the increasing
trade relations with European economies. Pizzati does not
argue which peg is more appropriate, but he analyzes the
implications of changing the exchange rate regime for
different sectors and labor groups. While pegging to the
euro entails more stability for the export sector, Lithuania
is still dependent on dollar-based imports of primary goods
from the Commonwealth of Independent States, more so than
other Baltic countries or Central European economies. The
author uses a multisector general equilibrium model to
compare the effects of dollar-euro exchange rate movements
under these alternative pegs. Overall, simulation results
suggest that while a euro-peg will provide more stability to
GDP and employment, it will also imply more volatility in
prices, suggesting that under the new peg macroeconomic
policy should be more concerned with inflationary pressures
than before. From a sector-specific perspective, pegging to
the euro will provide a more stable demand for
unskilled-intensive manufacturing and commercial services.
But other sectors, such as agriculture, will still face the
same vulnerability to exchange rate movements. This suggests
that additional policy measures may be needed to compensate
sector-specific divergences. |
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