Baltic Region Outlook (BRO) - a weekly economic bulletin in English language.  In this week’s Baltic Region Outlook (BRO)  edition - Latvia.

Main news topics:

  • Euro area GDP +1.7% in 2016, +1.8 in Q4 y-o-y
  • Russian GDP -0.2 in 2016, Polish GDP +2.8 in 2016
  • 21.8% of Latvia’s population at risk of poverty in 2015

BRO: Economic Insights

The Phillips curve links price or wage growth to a measure of economic slack, such as the output gap and provides a framework for analyzing and forecasting inflation developments.

Phillips curves for Euro area (19), Estonia, Latvia and Lithuania are estimated using the simple linear regression.

The simple framework model explains about 18-20 percent of variation in inflation. The coefficients associated with the gaps, or the “slopes” of the Phillips curve, are significant and their signs are as expected - wider negative gaps are  typically accompanied by lower inflation rates. According to the $R^2$ coefficient, the output and unemployment gap can explain around 18-20\% variation in inflation in this simple framework. The intercepts depict the expected average core inflation rate given a 0-gap from potential GDP. In this scenario, annual core inflation rate in Estonia is estimated at 2.6\%, in Latvia 3.3\% and in Lithuania 2.3\%

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Data: BRO_005_Latvia_2017_02_05