William Davidson Institute Working Paper 402
reached with a three-month lag for devaluation and a four-month lag for money. It
takes some one-year to the system to return at the pre-shock equilibrium.
Figure 10. The impulse function. Response of monthly inflation rate to one standard
deviation shock in the monthly money growth rate and in the devaluation rate. On the
horizontal axis: number of months after the shock.
This simple AR model is instructive as it points to the high speed of
transmitting nominal shocks in the Romanian economy. In mature monetary
economies, money shocks need over six months to translate into higher prices. In
Romania, the first impact can be observed only two months later.
This would point to a source of ineffectiveness of the NBR policy of managing
real exchange rates by systematic interventions in the foreign exchange market over
the 1997-2000 period. If the central bank buys dollars in an attempt to depreciate the
leu, it simultaneously increases the money stock, which, two months later, already
brings about higher inflation. In this context, the real depreciation is hard to be
achieved. The massive recourse to sterilization is the only chance to block the
increase in the money stock.
10. Conclusion and policy implications for Romania
Romania’s macroeconomic performance can be termed so far as
disappointing: the country has not been able to deliver steady growth, low
unemployment and low inflation. Many factors are microeconomic and can be related
to the slow progress with firm restructuring, privatisation and institution building. In
the text at hand we have taken these important constraints as given, to focus on the
effectiveness of monetary and exchange rate mechanisms and policies The National
Bank of Romania has been, so far, unable to carry out a consistent monetary policy,
which should subdue inflation. Under quite unfavourable circumstances and various
pressures (frequently of a political nature) it has often provided easy credit to
“sensible” sectors and dodgy commercial banks. Such quasi-fiscal operations have
been a resilient feature of NBR’s activity throughout the decade. At some moments, it
also financed directly public deficits, in contradiction with the price stability goal.
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