Abstract
In August 2005, the National Bank of Romania changed its monetary policy framework in an attempt to sharpen its influence on monetary conditions in the economy. It replaced the strategy of targeting monetary aggregates used since 1990 with inflation targeting, a ‘fashionable’ policy stance grounded in a systematic commitment to a single, low inflation target. This paper will argue that the regime switch has failed to bridge the gap between policy theory and practice that prevailed during the monetary targeting years, as the new policy regime is similarly at odds with the structural conditions in the Romanian economy.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Open Market Operations, standing facilities (the discount window and the deposit facility) and Reserve Requirements.
Monetary base=reserves of the banking sector with the central bank plus cash in circulation.
Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Rep, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan.
Net claims on the government and net claims on deposit money banks.
With government paper or forex interventions.
Facility offered by the central bank for depositing excess reserves at the end of the maintenance period.
In 1990 approximately 80% of the total imports were represented by intermediary imports, ratio reduced to around 67% in 2001.
Up to 2002, the US Dollar, then changed to the euro in view of the future accession to the EU.
Having become a EU member state in January 2007, Romania must fulfil the so-called Maastricht macroeconomic criteria for the adoption of the euro, one of which is a level of inflation closely following the most performing countries of the European Union.
Industrial production fell with 7% in 1997 and 14% in 1998.
In order to reduce the costs incurred by commercial banks, interest rates below the market rates have been paid on the reserves held with the central bank.
Complemented with administrative measures aimed at containing growth in foreign currency denominated credit.
‘In an attempt at preventing an inflation flare-up following the easing of the interest rate policy, the National Bank of Romania left the domestic currency to appreciate significantly in nominal terms as a result of the increasing capital inflows by limiting gradually its intervention in the foreign exchange market’ (NBR Annual Report, 2005, p. 12).
Since exchange rate movements do feed into prices, this policy stance would come under serious strain from sustained demand-side pressures on the forex market.
‘Developments in foreign exchange and money markets over the recent months have highlighted liquidity and interest rate levels triggering a faster appreciation of the domestic currency, which contributes significantly to a slowdown in aggregate price growth. Money market rates have constantly been below the monetary policy rate so far, which calls for the adoption of measures to enhance the signalling role of the latter’ (NBR press release February 9, 2007).
The Maastricht criterion for long-term interest rates specifies that the long-term interest rate should not surpass by more than 2% the average rate on 10-year government bonds in the three countries with the lowest rates of inflation of the Eurozone.
References
Bagehot, W . 1910: Lombard Street, a description of the money market. Henry S King & Co: London.
Bindseil, U . 2004: The operational target of monetary policy and the rise and fall of reserve position Doctrine. Working paper no 372, European Central Bank.
Clarida, R, Jordi, G and Gertler, M . (1999): The science of monetary policy: A new Keynesian perspective. Journal of Economic Literature, American Economic Association 37 (4): 1661–1707.
Davidson, P . 1977: Post-Keynesian monetary theory and inflation. In: Weintraub, S. (ed). Modern Economic Thought. University of Pennsylvania Press: Philadelphia.
Dow, SC . 2004: Endogenous money: Structuralists. In: Arestis, P and Sawyer, M (eds). Handbook of Alternative Monetary Economics. Edward Elgar Publishing: Cheltenham.
Friedman, M . 1956: The quantity theory of money: A restatement. In: Friedman, M (ed). Studies in the Quantity Theory of Money. University of Chicago Press: Chicago.
Gabor, D . 2003: Inflation in postcommunist Romania. Unpublished Master's Thesis, Institute of Social Studies, the Hague.
Goodhart, CAE . 1989: The conduct of monetary policy. The Economic Journal 99: 199–346.
Goodhart, CAE . 1994: What should central banks do? What should be their macroeconomic objectives and operations? The Economic Journal 104: 1424–1436.
Government of Romania. 1994: Technical memorandum of understanding. Bucharest, Romania.
International Monetary Fund. Selected issues. IMF country reports 1991–2004, Romania, Washington International Monetary Funds.
Keller, P and Richardson, T . 2003: Nominal anchors in the CIS. IMF Working paper 03179.
Moore, B . 1984: Contemporaneous reserve accounting: Can reserves be quantity constrained? Journal of Post Keynesian Economics 7 (1): 103–114.
Moore, B . 1988: Horisontalists and verticalists: the macroeconomics of credit money. Cambridge University Press: Cambridge.
National Bank of Romania. Annual reports 1990–2003. Bucharest, Romania.
National Bank of Romania. Inflation targeting quarterly reports 2005–2007. Bucharest, Romania.
Organization for Economic Cooperation and Development. 2002: Economic survey Romania economic assessment. OECD, Publishing: Paris.
Ritter, L, Silber, WL and Udell, GF . 1997: Principles of money, banking and financial markets, 9th Edition, Addison Wesley: Reading, MA.
Taylor, J . 2000: Using monetary policy rules in developing economies Bank of Mexico 75th Anniversary Conference.
Winiecki, J . 1988: The distorted world of Soviet-type economies. Routledge: London.
Woodford, M . 2003: Interest and prices: foundations of a theory of monetary policy. Princeton University Press: Princeton, NJ.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Gabor, D. From Rhetorics to Practice in Monetary Policy: A Romanian Perspective. Comp Econ Stud 50, 511–534 (2008). https://doi.org/10.1057/ces.2008.24
Published:
Issue Date:
DOI: https://doi.org/10.1057/ces.2008.24