R.E.M. 2.0, An estimated DSGE model for Romania

This paper describes the theoretical structure and estimation results for a DSGE model for the Romanian economy. Having as benchmark the model of Christiano et al. (2011), the additional features we introduce refer to partial euroization in the financial sector, oil as an input in production process, disaggregation of headline inflation into administered and core components, National Accounts consistent measures for GDP volume and deflator, and an extension of the foreign sector to a two country semi-structural model. Following a depreciation of the domestic currency induced by a risk premium shock, GDP decreases due to a stronger contractionary balance sheet effect (as some of the entrepreneurs are now exposed to exchange rate risk) relative to the expansionary impact through the net exports channel. With foreign currency financial transactions taking place only in EUR, while trade with goods and services in both EUR and USD, external shocks have different effects on the domestic economy, according to the originating country (i.e. Euro area or the US). Thus, one can assess the impact of diverging monetary policies of ECB and FED on emerging economies through both financial and trade channels.