In 2021, Latvijas Banka's research activities were organised in three priority directions:

1) monetary policy,
2) fiscal policy and
3) long-term growth and competitiveness.

The results were fed into discussions on economic policy changes both in Latvia and elsewhere in the euro area, as well as into public debates on topical socio-economic issues.

In 2021, Latvijas Banka published three working papers and two discussion papers on its website (see Appendix 5). Latvijas Banka also disseminates research findings to the public at large by explaining conclusions of working and discussion papers via articles and blogs published on and other popular websites.

Working papers on monetary transmission help to understand how long the support needed to the economy should be provided.

Work continued within the Eurosystem framework, and in 2021 it focused above all on detailed assessment of the monetary policy strategy, with experts of Latvijas Banka playing an active part in this process.

In July, the ECB published its new monetary policy strategy, followed by the accompanying analysis contained in 18 occasional papers. Employees of Latvijas Banka were co-authors of six of the above occasional papers. These studies analysed considerations for measuring inflation, examining inflation expectations, setting the price stability target and other relevant topics.

Research carried out by Latvijas Banka (see, e.g. the working paper On the Time-varying Effects of the ECB's Asset Purchases) led to the following conclusions:

  • Although the asset purchase programmes implemented by the Eurosystem have contributed to economic activity and inflation, their rates of return have followed a downward path over time. These conclusions suggest that asset purchases complement the traditional monetary policy instruments, e.g. changes in interest rates, but their contribution will keep on decreasing over time.
  • Price stability has been defined in different ways, which can all be used as a reference point for the euro area monetary policy, but the definitions most appropriate for the economic stability are the ones that consider price movements over a longer period of time. Thus, a gradual approach to the implementation of monetary policy contributes to economic stability and reduces the risks of sliding into recession.

In parallel with the strategy assessment, work carried out in cooperation with other euro area national central banks within the framework of the Eurosystem/ESCB Monetary Policy Committee and its Working Groups on Econometric Modelling, on Forecasting and on Public Finance continued. The substantiated discussions held in the above working groups form the basis for the Eurosystem's monetary policy decisions.

Research on the fiscal policy facilitates understanding of how to use the budgeted financial resources to support the economy.

Experts of Latvijas Banka carried out a study to assess the efficiency of the EU fiscal rules – the structural balance and expenditure growth rules. The study concludes that a properly calibrated expenditure growth rule can limit government debt, while making it possible to stabilise the macroeconomic situation. Thus, the expenditure growth rule should be preferred when improving the EU fiscal framework.

Studies on the issues topical for the Latvian economy allow an understanding of what should be done to ensure competitiveness and sustainability.

Latvijas Banka maintains and develops a range of the most advanced economic modelling tools in Latvia which are used to analyse current developments of the Latvian economy and draw up proposals for economic policies.

When developing new analytical methods, researchers of Latvijas Banka have estimated the most visible part of the shadow economy – envelope wages. The study results suggest that the occurrence and amount of envelope wages differ widely across groups of various businesses and employees, thus not only reducing budget revenue and weakening social protection of employees but also distorting competition among various firms.

Meanwhile, the study Interest Rate Spreads in the Baltics and the Rest of the Euro Area: Understanding the Factors behind the Differences led to a conclusion that the relatively high interest rates on loans to businesses prevailing in the Baltics can hardly be explained by lower quality of the loan portfolio (higher risk), more costly bank funding or other standard factors determining interest rates. Thus, an overly conservative lending policy of banks is likely to be one of the reasons underlying the high lending rates.

Researchers of Latvijas Banka also carried out an assessment of the effects of global prices on inflation in Latvia. The conclusions suggest that despite the material impact global prices fluctuate more than consumer prices, and they feed through to inflation gradually with a significant lag.

In 2021, modelling of the economic effects arising from climate change was commenced by introducing the CO2 equivalent and the related taxes into the production block of the CGE model. With the issue of climate change becoming increasingly topical, it has been intended to further develop modelling capacity in this area in the near future.

Public debate and discussion of the results play a crucial role in ensuring research quality.

Based on the results of the studies conducted, Latvijas Banka organised two expert discussions addressing topics vital to the Latvian economy. In April, a discussion was held on what the country should do to revive its labour market after the pandemicASee
, while the machine learning model for evaluating envelope wages developed by researchers of Latvijas Banka and BICEPS was presented in December (see the summary of the expert discussion "The shadow of envelope wages falls twice"). In 2021, Latvijas Banka's podcast Skanošais (Money) was also broadcast for the first time. The theme of its first episode was What does research on envelope wages reveal?

International cooperation with non-Eurosystem institutions also continued. Researchers of Latvijas Banka presented the results of their studies to the European Commission on several occasions, as well as, in cooperation with the OECD, carried out research on the factors playing a crucial role in the survival of Latvia's exports.

Quality research activities are impossible without continuous improvement of staff qualifications and thorough assessment of the results achieved. External reviewers from national central banks and academia of other countries are involved in assessing working papers to ensure their high quality. The publication of employees' working papers in internationally refereed journals is also supported. Five such working papers were published in 2021.

To raise researchers' qualifications and promote research work, presenta- tion of papers by Latvijas Banka's researchers at international conferences and seminars is enhanced on an annual basis. In 2021, papers by Latvijas Banka's researchers were presented at 24 conferences and seminars – the academic ones and those organised by Eurosystem/ESCB and other international institutions. To improve qualifications of Latvijas Banka's staff and strengthen international cooperation, Latvijas Banka also organises regular seminars to which highly qualified experts are invited to present their research results. 13 such seminars were organised in 2021.