The Propagation of European Monetary Policy Shocks into Romania's Economy

Abstract

The paper analyses within a two-country framework the role of monetary shocks in transmitting macroeconomic fluctuations across countries, with a special emphasis on the case of Romania. The investigation is important as Romania is preparing to give up its monetary sovereignty and become a full member of the Economic and Monetary Union.Based on the results of various specifications estimated for the reaction function of the ECB, we argue that the proper framework for handling the European monetary policy shocks must include survey data. In order to determine the magnitude of the effects of European monetary fluctuations on the Romanian macro indicators, we include the variables suitable for isolating the monetary policy shocks originating in the euro area, together with key national variables, in a structural vector autoregressive (SVAR) model identified by imposing long-term restrictions.Our findings are important in order to establish the degree of vulnerability of the Romanian economy to external disturbances and the degree of fulfilment of the prerequisites for entering the common currency area.