Monetary Policy Strategies in Romania. Historical overview and challenges for the future

This paper looks back at two decades of monetary policy in Romania focusing upon the analytical framework (the so called strategy or regime of monetary policy), which helped to order, analyse and interpret monetary policy relevant data and present and announce policy decisions made by the National Bank of Romania (NBR) to the outside world. In theory as in practice there is an ongoing debate concerning the optimal monetary policy strategy. As we look into the past decades we draw a line and conclude that inflation targeting (IT) eventually emerged as the preferred solution to the complex economical, political and social issues regarding present times for many industrial countries and emerging markets alike. Romania is not an exception. The policy framework has changed throughout the transition period, from broad money targeting (from 1990 till 1996) to high-powered money targeting (from 1997 till 2005), and then to inflation targeting (starting August 2005). The purpose of this paper is to make a critical analysis of the past monetary policy regimes in Romania and highlight what went wrong. Also, the paper reviews some distinguishing features of Romania’s IT monetary policy framework identifying possible challenges that the future holds, including the perspective of joining the Exchange Rate Mechanism (ERM II).