Monetary Policy In Lithuania Case Study

Register to read the introduction… 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 …show more content…
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 countries. Budget deficits, the interest rates and the inflation are few of these key areas which the country would have to manage to ensure the peg of Litas with …show more content…
Impact on business cost structures

The cost structures in most of the high tech industries remain primarily fixed as they require heavy investments on R&D etc. Thus, the reduction of the demand from the Europe has resulted in a heavy blow on the Lithuanian industries. While the impact of maintained monetary policy was more stabilizing on these companies, due to lower demand for their products, the companies were suffering largely.

While some of the industrial manufacturers went bankrupt as they failed to maintain the demand for the products at a level which they can survive, other companies had to reduce costs in line with most of the other companies in Europe and North America. They were compelled to reduce less profitable operations, contain capital expenditure to only most necessary and reduce the workforce. Also, the credit availability of the companies was impacted negatively as most of the financial institutions did not provide extensive credit facilities to the industries in view it would be too risky.

However, in the long run, the surviving companies became leaner and profit oriented by cutting the excess costs that they had prior to the economic crisis.

6. Impact on the