The propagation of European monetary policy shocks into Romania's economy

Abstract

This article analyses the role of monetary shocks in transmitting macroeconomic fluctuations across countries within a two-country framework, with a special emphasis on the case of Romania. Based on the estimation results for various specifications of the European Central Bank reaction function, we argue that the proper framework for isolating the European monetary policy shocks includes survey data. To determine the magnitude of the effects of European monetary fluctuations on the Romanian economy, we employ a Structural Vector Autoregressive (SVAR) model identified using long-term restrictions that comprises key Romanian macro-indicators and the variables considered suitable for isolating the European monetary policy shocks. Our findings are important to establish the degree of vulnerability of the Romanian economy to external disturbances and the degree of fulfilment of the prerequisites for becoming a full member of the Economic and Monetary Union.

Acknowledgements

We thank Professor M. Altăr – Bucharest Academy of Economic Studies – for valuable guidance and Professor S. Burke – Reading University UK – for the helpful comments regarding the volatility of the monetary shocks. We also acknowledge the financial support provided by the National University Research Council, grant PNII IDEAS 1863: ‘Modelling the influence of uncertainty, volatility and risk on the dynamics of complex socioeconomic systems’.