Subduing High Inflation in Romania. How to Better Monetary and Exchange Rate Mechanisms?

Subduing High Inflation in Romania.

How to Better Monetary and Exchange Rate Mechanisms?

Daniel Daianu^a & Radu Vranceanu^b

- 22 August 2001 -

ABSTRACT

Romania’s overall economic performance during the first ten years of transition can be
termed so far as disappointing: the country has not been able to deliver steady growth,
low unemployment and low inflation. This paper focuses on the effectiveness of
monetary mechanisms and policies during this period. Special emphasis is set on the
exchange rate mechanism. The first part of the text develops a short introduction to
relevant monetary theory in the transition context. In the second part, we analyse the
stylised facts pertaining to Romanian economy and put forward some weaknesses of its
banking system and monetary policies. The conclusion presents a set of recommendations
for a reform of the going monetary policy.

Keywords: Monetary policy, Banking system, Exchange rate mechanism, Romania,
Policy reform

^* The research is carried out in the framework of a project sponsored by the World Bank and the IWW. The
authors would like to thank Dorina Antohi, Anca Paliu and Surica Rosentuler from the National Bank of
Romania for their cooperation in getting useful data, as well as Damien Besancenot and André Fourçans for
their helpful remarks on a first draft. A preliminary version circulated as a CEROPE Working Paper, nr 21,
September 2000.

^a) Academy of Economic Studies and Romanian Center for Economic Policies, Bucharest. E-mail:
ddaianu@rnc.ro.

^b) ESSEC, Department of Economics, BP 105, 95021 Paris-Cergy, France. E-mail: vranceanu@essec.fr

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