Taylor Rule in Emerging Countries. Romanian Case

Abstract

Abstract Rules for Taylor-type monetary policy occurred in 1993 and during this time there have been widely used as an evaluation tool for monetary policy of different countries, either independently or in comparison with other monetary policy rules or guidelines. Using a large extent of these rules has been determined, on the one hand by the high capacity of characterize monetary policy actions, and on the other hand the simplicity of their handling of economic models. One of the most popular ideas in the monetary economy is that the central bank should follow the Taylor rule, under which the central bank should take into account in setting the interest rate of two factors: the inflation rate and the gap between the Gross Domestic Product and potential Gross Domestic Product (output gap). It should be noted that monetary policy decisions affect the decisions of consumption / investment, but also on the asset allocation. Taylor rule guides monetary policy to reconcile price stability and full employment rate, goals that are sometimes divergent on short-term. In the short term perspective of Romanian banking system the main problem that arises is determined by the terminus point of monetary policy normalization: how far the central bank will cut the benchmark interest rate? In this paper, we want to apply the Taylor rule (the monetary policy instrument used by central banks in developed countries before the Great Recession), in order to see if we are approaching the end of the process of normalizing monetary policy in Romanian banking system. In other words, this paper aims to examine whether the use of interest rate as an instrument, following a Taylor rule type, would have been used successfully by National Bank of Romania. In the financial literature, the Taylor rule is considered an accurate description of how monetary policy decisions are taken by the FED, but also by other central banks.