Exchange rate determination during hyperinflation: the case of the Romanian lei

Abstract

In this paper the monetarist model of the exchange rate determination during the Romanian hyperinflation is tested using data for the lei/dollar exchange rate. A number of novel findings are reported. In particular, the analysis, which validates the monetarist approach, shows that a rapid increase in the money supply and inflation in Romania has been a source of a depreciating lei, while an increase in the Romanian real income has been a source of an appreciating lei. One policy implication of the results is that any policy aimed at reducing the rate of monetary expansion and inflation, and producing economic growth should boost the value of the lei.