William Davidson Institute Working Paper 402
currency appreciation, which will bring about an additional favourable
impact on curbing inflation. The main shortcoming is a risk that the real
appreciation entails a reduction in export competitiveness. True, in the
long run, this may force firms to restructure and increase productivity. But
in the close future, this policy may push out of the market an excessive
number of firms, in the context where the Romanian economy is already
very weak.
c) Should Romania adopt a crawling peg (against the euro) combined with a
tough disinflation policy? To be effective, this policy change requires that
(a) the Central Bank has all the political autonomy and technical ability to
pursue such a policy, (b) an appropriate depreciation rate target is set, and,
(c) in general, mutually consistent policies are adopted in the fiscal and
structural realms. As the devaluation rate should not be lower than the
inflation rate, sterilisation would be systematic, to prevent the excessive
increase in the money stock. Simultaneously, one may consider the
implementation of “soft” capital controls, essentially aimed at dissuading
speculative attacks (Eichengreen, Tobin and Wyplosz, 1995; Krugman
2000). Finally, a public body should monitor the foreign debt of
commercial banks and firms, in order to rule out excessive private
borrowing in foreign exchange. Such prudential norms would limit the
adverse impact of devaluation, via a balance sheet effect (Krugman, 2000).
Of course, by the moment when the economy takes off and inflation is cut
to normal values, the crawling peg regime could be replaced by a flexible
one (as did Poland in 2000).
Our analysis has put forward some relevant elements of an analysis of the
monetary and exchange rate policies in Romanian transition economy. The
improvement of these policies is essential for achieving lasting and sustainable
growth. In the light of this paper, it appears that subduing Romanian inflation is not
an easy, but it is a possible task. The paper did not investigate whether the reduction
in inflation should be abrupt or gradual. Most of our conclusions point toward the
necessity of a gradual disinflation. This interesting topic is worth being addressed in a
further research.
26
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