dollar. these effects in turn influenced the overall response of demand and inflation to the acceleration in productivity. rate and the nairu. the nairu constructed in this way is best thought of as being a long - run value that is relevant once the economy has fully adjusted to any shocks or in the absence of such shocks. but, of course, additional shocks almost always directly affect inflation, most often on the supply side of the economy. one, therefore, must take into account both the demand pressures captured by the relationship between the unemployment rate and the nairu and supply shocks. alternatively, one could derive an alternative measure of the nairu that took into account the supply shocks. by its nature, such an adjusted nairu would be more of a short - run concept. because an acceleration in productivity initially lowers inflation for any given unemployment rate, it also lowers the unemployment rate consistent with steady inflation in the near term. that is, the direct disinflationary effect lowers the short - run nairu relative to its long - run value. whether or not inflation will rise or fall in the immediate aftermath of an acceleration in productivity cannot be judged therefore by comparing the actual unemployment rate to the estimate of the long - run nairu. the relevant comparison is between the current unemployment rate and an estimate of the short - run nairu that takes into account the disinflationary effect of the productivity shock. my preference is to estimate a short - run nairu that directly takes into account the disinflationary effect of an acceleration in productivity because the effects of an acceleration in productivity on inflation may persist long enough that the adjusted nairu might be useful in policy decisions. on the other hand, i would leave out of such an estimation the effect of swings in oil prices, for example, because their effect on inflation dissipates more quickly. the demand and direct disinflationary effects are both temporary, but the period over which each has its influence depends on different considerations. the persistence of the demand effect depends on how long it takes for business capital stocks to adjust to higher expected profitability, for consumer durables to adjust to higher wealth and higher projected future income, and for market interest rates to close the gap relative to the higher equilibrium real interest rate. the direct disinflationary effect of an acceleration in productivity is, in my view, temporary because it likely arises from the lag in the adjustment of nominal wages to the productivity acceleration. it dissipate

ilmars rimsevics : standing firm against manipulations with lats'exchange rate article by mr ilmars rimsevics, governor of the bank of latvia, published in the daily diena on 16 february 2007. * * * economists are currently discussing ways to improve the ability to compete of the latvian economy and they are right to do so because it is being undermined by high inflation. morten hansen from the riga school of economics has also devoted this issue a great deal of thought, sharing some of his insights with the readers of the newspaper diena ( 10 february ). the latvian economy is still the fastest growing economy in the european union and that should make us happy because our standard of living is raised. the downside, from the macroeconomic perspective, is that the speed at which we are traveling can be compared to driving at 200 kilometers an hour, because it is accompanied by high inflation, record high prevalence of imports over exports ( current account deficit ), decreased ability to compete, a fast growing foreign debt. for quite a while now, the main problem of the latvian economy has been the overly high domestic demand that exceeds supply ; the economists call it “ overheating ” of the economy. the budget deficit is also too high for this juncture in our economic development : we are not saving for the moment when the pace of the economy will abate. estonia, where the situation is very similar, last year recorded a budget surplus of 3 % of gdp. ) if we fail to have a firm grip on the steering wheel and we dismiss the danger of driving too fast, our breakneck speed can land us in a ditch! we can only regret that mr. hansen has not applied his theoretician ’ s savvy to come to the aid of the latvian economic policy makers : to specify the list of tasks that would allow the excessively rapid development to slow down so that latvia would continue to develop in the long term with a yearly growth of 6 - 7 % instead of running the danger of overheating as is obvious from the estimates of the last quarter of last year. it would have been wonderful if mr. hansen had made use of his teaching skills, which involve the ability to get things across with ease, to remind us that in the marathon distances – in our case, approximating the level of european standard of living – sprinter ’ s tactics are of no use. in such a list, there would be tasks that produce immediate