Abstract
For establishing the suitable monetary policy it is essential to know if there is a relevant relationship in practice between gross domestic product (G.D.P.) variations and monetary variables. The purpose of this study is to analyse the causality between output variation and money aggregate in Romania for quarterly data in the period 2000:Q1–2015:Q2. Moreover the impact on G.D.P. growth of other variables connected with money demand is assessed using Bayesian techniques. The results indicated a bidirectional relationship between G.D.P. variations and rate of real money demand in the mentioned period. The Granger causality test combined with stochastic search variable selection indicated that active interest rate and discount rata mostly explained G.D.P. variations. According to results based on Bayesian regime-switching models, contrary to expectations, the interest rate increases continued to generate higher output variations, the consumption being the engine of economic growth in Romania. In periods of economic recession, the lower interest rate stimulated the recovery of the economy.
Highlights
The main aim of this research is related to the analysis of the relationship between output variation and various monetary variables
A reciprocal causality was identified between money and output fluctuations, but the increase in interest rate in expansion periods did not slow the economic growth in Romania
The relationship between G.D.P. and monetary variables has been widely discussed in the context of real business cycles
Summary
The main aim of this research is related to the analysis of the relationship between output variation and various monetary variables. The results of Granger causality tests will be combined with a Bayesian procedure for variable selection in order to identify the most relevant variables in explaining output fluctuations. Is it a causal relationship in Granger sense between money and output in Romania? A reciprocal causality was identified between money and output fluctuations, but the increase in interest rate in expansion periods did not slow the economic growth in Romania. After this introduction, the article focuses on literature review, methodological background and the empirical analysis of the money-output relationship in Romania.
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