Sentiment-Driven Asymmetries in Romanian Monetary Policy Transmission

A threshold Bayesian VAR model is applied to study nonlinearities in Romania’s monetary policy transmission mechanism, with the transition variable represented by the Economic Sentiment Indicator. The model identifies four major episodes with respect to the confidence stance during the 1997–2014 period: the two low-confidence episodes are related, respectively, to the Asian crisis (late 1990s) and the Great Recession (2009–2013 observations), while the two high-confidence episodes consist of the economic boom of 2000–2008 and the current restored sentiment stage. Output and prices react differently to monetary policy and to exchange-rate shocks during the two regimes. A counterfactual experiment proves that the heterogeneities are driven by changes to the overall macroeconomic transmission framework, as well as to the central bank’s reaction function. An alternative specification with industry confidence rather than aggregate economy confidence suggests that, following the recent crisis, firms’ sentiment recovered much faster than that of consumers and the services sector.