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Internal *revaluation* in the Baltics

By July 4, 2014No Comments
Real World Economics Review Blog | July 4, 2014

For quite some time Latvia was an austerity and internal devaluation poster child. Lately, however, the voices lauding ultra-unemployment and the crushing of already very low wages have silenced – as wages are rising rapidly. For a time I suspected, cynically, that this wage shock might be a cunning plan of these sly Baltics – once they joined the Euro they increased their wage level (Latvia business economy wages increased at a healthy 7% rate, 2014 Q1 (Eurostat), directly after Latvia joined the Euro), to obtain a free Bratwurst.

But this was probably not the case. According to a new NBER working paper by Cavallo, Neiman and Rigobonmarket forces might be at work. Joining the Euro seems to lead to a fast convergence of price levels:


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