Latvia's Great Depression
The main reason for this depression is the sudden shift from a real money supply growth of about 30% during the boom years, to a contraction in real money supply of more than 20% in the year to March 2009. That reflects both a 17.8% nominal money supply contraction and a price inflation rate of 8.2%. Latvia's depression is thus a extreme but clear real life illustration of the Austrian business cycle theory
The price inflation rate fell back significantly in April, but it is still far too high at 6.2%. Latvia has adjusted more slowly than neighboring Estonia, which is why its depression will probably be both longer and deeper than Estonia's.