Budgetary Discipline and Internal Devaluation – Estonian Method to Overcome the Crisis

Bernadeta Baran

DOI: http://dx.doi.org/10.12775/EQUIL.2014.008

Abstract


The purpose of this article is to outline the main reasons and effects of the  Estonian adjustments in response to the global financial and economic crisis. Estonia  chose significant budgetary savings, in contrast with most other countries stimulating  their economies by expansionary fiscal policy and leading to fiscal imbalances  and growing public debts. Estonia did not carry out a devaluation of its currency,  but restored competitiveness through internal devaluation. This strategy allowed  Estonia to maintain a fixed exchange rate, fulfill the Maastricht criteria and adopt  the single currency. As a result, Estonia has increased the stability of its economy,  restoring and enhancing confidence among investors. At the same time, the Estonian  strategy confirmed the existence of non-Keynesian effects – the positive economic  results of public spending reduction.  


Keywords


internal devaluation; budgetary adjustments; competitiveness; crisis

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