Monetary Policy Transmission Mechanism in Romania Over the Period 2001 to 2012: A Bvar Analysis

Abstract

Abstract In this study we intend to highlight the monetary transmission mechanism and how the main economic and monetary variables react to various shocks in Romania over the period 2001 to 2012 using a BVAR model with a KoKo Minnesota/Litterman prior. BVAR models solve the overparameterization of VAR and have advantages in terms of objectivity and flexibility. The analysis reveals important conclusions. The interest rate channel is being more and more consistent in the last years, the positive aspect that emerges from this study being related to the absence of output and price puzzle. Under these circumstances, the role and the responsibilities of the central bank acquire a greater importance, given its ability to control the interest rate in accordance with its objectives. The relationship between inflation and unemployment rate is consistent with the Phillips curve in Romania.

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