I am in Lithuania at the moment and today I spoke at the Baltic Investment Forum. Here is a report on what I said – it is mostly a fair description of what I actually said. If you don’t bother to read the conclusion is the following: Easier monetary policy, fiscal consolidation and structural reforms.
PS Richard Koo and I had a great debate about the crisis. Richard believe we are in a balance sheet recession and we need expansionary fiscal policies to get us out of the crisis, while I believe in monetary easing. Lets just say we did not agree on anything.
Talking to the Lithuanian Prime Minister and Finance Minister…
The Market Monetarist 
Saturos
/ October 28, 2012Lars, you are cool… I wish I got to hang out with Prime Ministers.
So when you said to Koo, “What about the creditors?”, what was his reply? Did you show him any of Beckworth’s charts?
I’m not sure you are completely right in saying that Lithuania is helpless. It is a sovereign nation after all. To the extent that Lithuania’s woes have been caused by its NGDP collapse of 2009, it can simply devalue the litas, or better yet float it given the prospect of continuing mishandling of monetary policy by the ECB. It should absolutely not proceed with its plans to peg to the Euro in 2014.
On the other hand to the extent it is also suffering from lost trade with Europe (hitting RGDP further and pushing inflation up to 4%) it will just have to sit tight and weather the storm, as obviously exporters can’t switch trading partners over a single business cycle.
Good work advocating better labor-market policy in Lithuania, the conservatives seem to have the right idea (though it also seems that they will lose).
Ingrida Šimonytė is looking very pleased to be told that hers is the hardest job in the world…!
Saturos
/ October 28, 2012To join the Euro in 2014, I meant, it’s already pegged!
Lars Christensen
/ October 28, 2012Saturos,
Thanks, but I don’t generally think it is desirable to hang out with Prime Ministers, but if they listen it can be rewarding to some extent. And this particularly Prime Minister is a likable guy. Whether he will be Prime Minister for much longer is another question. Today day is the second round of voting in Lithuanian parliament elections and it looks like a bit of an uphill battle for the PM and his party.
Ingrida Šimonytė has worked tremendously hard over the last four years – as you right note there is really not much they can do under the present institutional set-up other than just continue fiscal consolidation. Ingrida always insist that she is NOT a politician and she is not. She is a economist so she often makes a lot more sense – to other economists – than many of her European colleagues.
Regardig Koo – lets just say we were very, very far apart.
Saturos
/ October 28, 2012Nice to know it’s possible to join politics without becoming political. But it also helps to be in a sane, technocratic part of the world – at least if you believe Scott Sumner’s theory of governments.
Koo is some kind of Post-Keynesian like Stiglitz, isn’t he?
Saturos
/ October 28, 2012This graph says it well: http://www.economywatch.com/economic-statistics/country/Lithuania/
Lars Christensen
/ October 28, 2012Saturos, a graph over the NGDP level in Litas says it best.
There you will see the boom-bust nature of the Lithuanian economy over the past six-seven years. Scott, would say that he do not believe in bubbles. But Lithuania and the other Baltic States certainly had something that comes close. An monetary driven boom that ended in a bust and now we are in an ECB driven secondary deflation. It is very textbook – you have already drawn the conclusion yourself, but that option is not yet on the agenda in Latvia and Lithuania and Estonia has even joined the euro area. So either you get the ECB to do the right thing (I am skeptical about that) or you are in a secular deflationary state for some time. I am, however, fairly optimistic about next year, but that is do to the fed and the PBoC rather than the ECB.
Saturos
/ October 28, 2012Yes, the boom-bust cycle shows up on this graph: http://www.gecodia.com/Lithuania-GDP-Growth-Rate_a503.html
But I still think devaluation would be helpful – you can’t just say that Lithuania’s problems are monetary while ignoring the fact that it has its own central bank, which does have some freedom of action.