So Russ Roberts just posted an anti-Krugman post (surprise!) on Estonia, which has finally motivated me to google around a little bit and learn about what happened in mid to late 2009 that gave it a nice, but as Krugman points out - not fantastic - pace of growth.
Just ten minutes of googling leads me to think that all the chatter on this has been going in completely the wrong direction, but maybe I'm wrong and you could help me out.
So in 2007, 2008, early 2009 I see news stories about exchange rate risk keeping Estonian borrowing costs high along with doubts that they'll successfully join the euro. Then in late 2009 and 2010 I see stories saying that exchange rate risk is no longer a big concern and Estonia will definitely join the euro as planned, by 2012 at the latest (they actually joined in early 2011).
Is it just me, or is the end of the exchange rate risk chatter probably a huge factor - perhaps the only factor - to consider in thinking about Estonian growth numbers?
Now, clearly you don't want investors acting coy because they're scared you'll devalue. In that sense, so far so good for Estonia. Whether the euro will serve them well in the next couple years is, of course, a different question entirely. Arguably the even better option would have been to have stopped talking about devaluation in 2008 and 2009 (thus scaring investors) and instead just doing it. Obviously how you "just do it" will be a big factor in whether investors will worry about more to come going forward.
But it seems to me the talk of austerity vs. spending kind of misses the real point in Estonia. Am I wrong?
Notes on Black-Scholes (From 2003)
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