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External Factors Influence On Inflation: The Case Of Romania

Author

Listed:
  • Capraru Bogdan

    ("Al. I. Cuza" University of Iasi, Faculty of Economics and Business Administration)

  • Ihnatov Iulian

    ("Al. I. Cuza" University of Iasi, Faculty of Economics and Business Administration)

Abstract

In this paper we try to assess the main external determinants of inflation dynamics in Romania. The literature in the field of measuring inflation dynamics is wealthy and various. There are many developing country - level studies that examine inflation dynamics: Blavy (2004) - Guinea, Duma (2008) - Sri Lanka, Gottschalk et al (2008) - Sierra Leone, Moriyama (2008) - Sudan, Mwase (2006) - Tanzania, Williams and Adedeji (2004) - Dominican Republic, Hossain (2005) - Indonesia, Almounsor (2010) - Yemen. The issue of Romanian inflation dynamics is present in many and various studies, like Hammermann (2007), Pelinescu and Dospinescu (2006), Budina et al (2006) etc. There are no other recent studies that analyze the external determinants on Romanian inflation dynamics. In our paper we estimate an OLS single equation model, using a methodology derived from Almounsor (2010). The empirical analysis uses monthly data from August 2005 to January 2011. The start point of the data series is the moment of a major change in the National Bank of Romania (NBR) monetary policy: adoption of the inflation targeting regime. The independent variables used in our research are: harmonized consumer price index of EU-25 countries, EUR/RON exchange rate, crude oil price index (for analyzing the external shocks effect) and M2 monetary aggregate (intermediate money supply) as a control variable. The outcomes suggest that inflation in Romania is driven mainly by international price shocks - harmonized consumer price index of EU-25 countries. The EUR/RON exchange rate depreciation has a small influence on domestic inflation. In the short run, the effect of the international oil price is insignificant. Money supply, used here as a control variable, is shown to have a very small effect on inflation in Romania when using OLS regressions. The results show that 66% of the domestic inflation variance is explained by the independent variables in our model.

Suggested Citation

  • Capraru Bogdan & Ihnatov Iulian, 2011. "External Factors Influence On Inflation: The Case Of Romania," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 469-475, July.
    • Handle: RePEc:ora:journl:v:1:y:2011:i:1:p:469-475
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    References listed on IDEAS

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    1. Pelinescu Elena, 2006. "Modelarea inflaţiei în România," Revista OEconomica, Romanian Society for Economic Science, Revista OEconomica, issue 01, March.
    2. Mr. Jonathan David Ostry & Ms. Anne Marie Gulde & Mr. Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 1995/121, International Monetary Fund.
    3. Budina, Nina & Maliszewski, Wojciech & de Menil, Georges & Turlea, Geomina, 2006. "Money, inflation and output in Romania, 1992-2000," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 330-347, March.
    4. Pelinescu, Elena & Turlea, Geomina, 2004. "Modeling Inflation In Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 1(4), pages 68-86, December.
    5. Rodriguez-Palenzuela, Diego & Thimann, Christian & Backé, Peter, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 132, European Central Bank.
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    Cited by:

    1. Ionuţ Cristian BACIU, 2014. "The Relationship Between Inflation And The Main Macroeconomic Variables In Romania," Network Intelligence Studies, Romanian Foundation for Business Intelligence, Editorial Department, issue 4, pages 161-172, November.

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    More about this item

    Keywords

    inflation dynamics; external shock; international prices; exchange rate; Romania;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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