MONETARY POLICY, EXCHANGE RATE, AND THE TRANSMISSION MECHANISM IN ROMANIA: A STRUCTURAL VAR APPROACH

In open economies, monetary policy impulses may induce output fluctuations through the net exports effect and the balance sheet effects of the exchange rate channel. The main purpose of this study is to assess the existence and effectiveness of the exchange rate channel of monetary policy transmission mechanism in Romania. The investigation is conducted in a structural VAR framework. Monetary policy impulses are identified as base money innovations, while the money multiplier shocks reflect endogenous fluctuations in money supply. The results indicate that the exchange rate channels of the monetary policy transmission mechanism do not appear to be functioning in the standard manner under the current policy regime and structural relationship of the Romanian economy. This is not necessarily bad news for the Romanian policymakers, since net exports and balance sheet channels would induce contradictory effects on output, and, therefore, ambiguous net effects.