Macroeconomic policy regimes in emerging market candidates for a currency union: The case of Latvia

This paper has the goal to explore the functionality of the economic development in emerging countries, which are on their way of joining a currency union based on the concept of macroeconomic policy regimes (MPRs). Functional MPRs are considered those that deliver sustainable economic growth, employment and more equitable income distribution. A macroeconomic policy regime consists of policies (foreign economic policy, industrial policy, wage policy, monetary policy and fiscal policy), the financial system, and the institutional frameworks in which the economies are embedded. The MPRs of emerging countries, candidates for a currency union, applied to the case of Latvia will be analysed using a Post Keynesian approach. It will be argued that the institutional changes in Latvia have paved the way for a dysfunctional policy mix, such that led to high current account deficits, capital flow volatility, large employment losses and instable economic development. This paper suggests that to reduce the current account deficits and achieve a more sustainable growth, foreign economic policy and the industrial policy should be given high priority.