William Davidson Institute Working Paper 402
NBR main task of fighting inflation, given that, most of the time, all these credits
translated into a larger money supply.
From Table 1 it can be seen that the most spectacular increase in NBR assets
refers to the net reserves of foreign exchange. After the 1999 mini-crisis, the central
bank bought large quantities of foreign currency and foreign currency denominated
assets. Today the stock of foreign reserves looks satisfactorily (Figure 7). The strategy
of buying dollars entailed a sharp increase in the monetary base and tested the ability
and willingness of the NBR to sterilise excess liquidity. Two factors pushed towards
this decision: on one hand, under IMF’ nudging, Romania aimed to recover a
“normal” stock of foreign reserves, to signal her credibility as an international
borrower. On the other hand, NBR officials considered that the leu nominal
depreciation was necessary in order to maintain export competitiveness. Both of these
motivations are sensible, although one may be more ambivalent about the relationship
between nominal depreciation and real depreciation in the high-inflation Romanian
context, and also about the impact of a weak leu on export competitiveness in the
long-run. It is also not very clear whether the speed of recovering the reserves was the
most appropriate. On one hand, given the available sterilisation instruments, such a
strong variation in NBR assets clearly brought about a huge increase in the monetary
base; this increase fuelled the money stock and prices, and caused policy slippage
which pushed inflation beyond its target. One can submit that a more gradual reserve
recovery would have reduced policy slippage and better tempered inflation. On the
other hand, in view of the recurrent emerging crises and the need to avert external
shocks, the central bank’s obsession with rebuilding its reserve stock at a rapid pace
did make sense.
Figure 7: Gross foreign assets with the NBR in US dollar equivalent. January
1992 to March 2001. Source: NBR Monthly Bulletins
7.4. Sterilization: NBR methods
When a central bank intervenes in the foreign exchange market and acquires
foreign currencies, it pushes towards (nominal) depreciation the domestic currency.
But the increase in the assets of the central bank comes with an equivalent increase in
its liabilities, more precisely of the reserves that ordinary banks held with the central
18