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A study of the impossible trinity in Romania

Author

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  • Bogdan BĂDESCU

    (Bucharest University of Economic Studies, Romania)

Abstract

Using a VECM and a Taylor type rule it was shown that the central bank kept the autonomy of the monetary policy as the policy rate was modeled primarily based on the evolution of the inflation rate. Forgoing the exchange rate stability is not possible due to the large volume of foreign currency loans and also to other factors. The inclusion in the central bank’s objective function of a variable linked to the exchange rate may cause a conflict between inflation targeting and exchange rate management. Therefore, the best approach seems to be the use, in addition to the policy rate instrument, also of FX interventions. As for the liberalization of capital flows, the decision is at least questionable, given that, on one hand, foreign capital ended up holding a significant share in the economic activity and on the other, the macroprudential measures that authorities began to implement might have limited effects.

Suggested Citation

  • Bogdan BĂDESCU, 2015. "A study of the impossible trinity in Romania," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(603), S), pages 199-214, Summer.
    • Handle: RePEc:agr:journl:v:xxii:y:2015:i:2(603):p:199-214
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    References listed on IDEAS

    as
    1. Caraiani, Petre, 2011. "Comparing Monetary Policy Rules in the Romanian Economy: A New Keynesian Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 30-46, December.
    2. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
    3. International Monetary Fund, 2014. "Romania: First and Second Reviews Under the Stand-By Arrangement and Requests for Waiver of Nonobservance of a Performance Criterion, Modification of Program conditionality, and Rephasing of the Avail," IMF Staff Country Reports 2014/087, International Monetary Fund.
    4. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos d Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
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