abu dhabi, 2010
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1. Monetary policy in Lithuania4
2. Key reasons of monetary policy4
3. Enacting the monetary policy5
4. Impact of economic crisis on demand and supply5
5. Impact on business cost structures6
6. Impact on the economy6
8. Economic outlook7
Lithuania was a former Soviet state which separated from the Soviet Union in 1991. After the separation, the country went through a number of economic difficulties due to the falling of the industrial infrastructure of the country and the economic stability the country enjoyed previously was lost. Thus, Lithuania had to gradually adopt open market policies and adopt the needs of the capitalist system. The country is one of the most successful countries to adopt open market reforms and improve their economic performance up until the time of the recession that the country faced most recently due to the global economic crisis. Due to the high import export orientation of the country and the fact that the economy was heavily dependent upon the greater European economy, the impact of the recession was felt greatly on the economy of Lithuania. However, the inherent factors and the gradual recovery of the economies of the Europe has given a lifeline to the Lithuanian economy and it is started a very modest growth currently. While the growth has returned, the scarce of the recession are deeply felt within the Lithuanian Economy.
1. Monetary policy in Lithuania
The monetary policy of the country is primarily decided by the Central Bank of Lithuania (CBL) under the guidance of the Ministry of Finance. The exchange rates are kept fixed as the country’s currency unit- Litas is pegged with the Euro. CBL explains the key reason behind adopting a fixed currency regime is to maintain the financial stability of the country and avoid undue price impacts due to the exchange rate fluctuations. Thus, CBL maintains a mixture of foreign currency reserves, further investments in the form of gold and investments in foreign currencies, to ensure that the exchange rate fluctuations would be controlled and Litas and the Euro peg is effectively maintained. However, due to the impact of the recession, the country’s foreign reserves dropped to US$ billion 8.55 in early 2010 from US$ 9.52 billion in early 2009 (CIA Fact book, 2010). Therefore, it is clear that the country is primarily looking at the maintenance of the economic stability through the monetary policy of the country and has taken steps (such as maintaining fixed currency regime) to ensure that the financial stability is maintained.
2. Key reasons of monetary policy
Lithuania is primarily trading with the Europe; the exports to EU are 65% of the total while the imports from the country remain around 58% (Government statistics, 2010). Thus, pegging the currency to Euro ensure that the import and exports have a stable price and the industries can account for their income and expenditure without considering the foreign exchange fluctuation related factors. This provides price stability to industries.
Further, Euro is generally a well managed currency unit and there are strict guidelines in place in maintaining financial discipline amongst the EU...