Assessment of the natural rate of unemployment and capacity utilisation in Latvia

Abstract

Inflation and its dynamics feature among the most important indicators in the focus of such economic agents as producers, consumers, investors, monetary and fiscal policy makers. Risks of high inflation or deflation enhance the need to profoundly investigate factors and causes of unfavourable inflation dynamics. Optimal capacity utilisation is one of the ways to escape endogenous pressures that increase inflation or cause deflation. This study pursues the aim of assessing short-term relationships between the capacity utilisation rate and inflation in Latvia. The authors have set a target to determine the capacity utilisation rate at which no pressure is exerted upon inflation and to show whether the capacity utilisation rate of the Latvian economy was an underlying factor that caused a rise in inflation after EU accession.