Some Particularities of the Monetary Transmission Channels in Romania

• Author: Ramona Dumitru, Cornel Nistor, Răzvan Ştefanescu
• Position: “Dunarea de Jos” University Galati, Faculty of Economic Sciences
• Pages: 346-354

Page 346

Introduction

In 2005, the National Bank of Romania (NBR) adopted the inflation targeting regime as an explicit anchor for conducting the monetary policy. It was proved that strategy could lead to an improvement of the monetary policy performance if it was applied properly. Among the main conditions for an adequate inflation targeting implementation it is an institutional commitment to price stability as the monetary policy primary goal, backed by a significant credibility in the central bank capacity to achieve it. In the case of Romania, some important challenges make the inflation targeting regime very difficult for the near future. First, in order to participate to ERM II and then to the euro zone, the process of reducing inflation has to be continued. Second, a major financial crisis affecting the world economy is still a significant threat. Third, the elections programmed for 2008 could put in danger the financial equilibrium.

In these circumstances it is very important that central bank capacity to intervene efficiently in order to maintain the monetary stability. This capacity is conditioned by the understanding of the mechanisms through which the monetary policy affects the economy. In Romania, the monetary transmission channels have some particularities that have to be approached for a proper inflation targeting regime.

In the last decades, the vector autoregressive (VAR) models became widely used in the analysis of the monetary transmission channels. This methodology facilitates the study of the complex interactions between the factors affecting the monetary equilibrium. Some papers approached the NBR monetary policy by VAR analysis revealing the actions of some relevant factors affecting the macroeconomic performances. However, the complexity of this subject makes useful any new attempt to assess the macroeconomic variables responses to the monetary policy changes. In this paper we try to study, using a VAR model, the particularities of the main monetary transmission channels in Romania in relation with the inflation targeting regime adopted by NBR.

Page 347

Literature Review

The transmission mechanisms of the monetary policy were approached more than a half of century ago, in the traditional Keynesian model. The key role was assigned to the interest rate channel. For example, an expansionary monetary policy is supposed to cause a fall in the real interest rates and that leads to a cost of capital decrease. This will cause a rise in the investment spending which will stimulate the aggregate demand increasing the output¹.

In the last decades, after significant changes occurred in the monetary policy perspective, other transmission mechanisms were approached: exchange rate channel, equity price channel, bank lending channels, balance-sheet channels a.s.o.

The monetary policy could affect the output through exchange rates. For example, an expansionist monetary policy leads, usually, to a depreciation of the national currency. That raises the net exports stimulating the economic growth². Another way that monetary policy could affect the output is through the equity price. In the specialized literature many such transmission mechanisms were approached. Tobin (1969), for example, proposed q Theory of investment and wealth effects on consumption by which an expansionist monetary policy could cause an increasing of investment spending and hence in aggregate output³. The important role of lender that banks play make them part of the monetary transmission channels. For example, an expansionist monetary policy could lead to banks deposits increase. That generates a rise in the bank loans that will stimulate the investment consumer spending, leading to an increase of the output. However, in the industrialized countries, after the decline of the traditional bank lending business from the last decades, this channel became less important⁴. The monetary policy could have an important impact on the net worth of a firm registered in the balance-sheet. Because of this situation, in the specialized literature there were approached some balance-sheet channels. For example, an expansionist monetary policy could lead to a rise in equity prices which raises the net worth of firms. This increases the investment spending, stimulating the economic growth⁵.

For the emerging markets, there were revealed significant differences in comparison with the industrialized countries, especially because of the insufficient development of the financial markets, the bigger importance of bank lending and the ambiguous autonomy of the central banks. The macroeconomic systems circumstances lead to important particularities of the monetary transmission channels. Some recent researches find out major differences not only between the emerging markets and the industrialized countries, but also between the emerging markets⁶.

It is useful that monetary transmission channels to be studied in relation with the applied monetary policy regime. In the recent years, many industrialized and transition countries implemented the inflation targeting regime. This could increase the...