IMF finally points to weak transmission mechanism in Romania

One of my themes regarding Romanian monetary policy is that transmission mechanism is not working.  It did not work before 2008 and it has literally stopped since then.

The recent IMF Country Report on Romania brings support to my view. This is what it says at page 21:

Money Matters, Romania’s case

This is my contribution to today’s seminar at the National Bank of Romania: Money Supply and Inflation.
My main conclusion is that much like the FED in the 30s the NBR misjudged the effect of the economic crisis and the stance of the economy and tighten monetary policy. The result was recession and short circuiting of the credit channel. I attribute the wrong assessment to too much reliance on the output gap and too many objectives besides stable prices – stable exchange rate and financial stability.

To reach its potential Romania needs to “relax”

I am not a fan of “output gaps”, this measure of how much are resources in the economy employed. But central banks all over the world use it and thus we have to at least mention it.
In theory an output gap shows how far is the economy from its potential. A positive gap means that current GDP is above its long term potential while a negative one shows that the opposite.

NBR’s rate correlation with real economy rates is at best spurious

One theme I keep repeating is that the credit channel is not working in Romania ans will not be working as long as the central bank is focused solely on the exchange rate.
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Current way of injecting liquidity will not lower long term rates

NBR delivered another rate cut today from 5.75% to 5..5%. It is the third consecutive cut in the key rate and a good moment to see how has this easing cycle transferred into the real economy. The main question is if these rate cuts get to the real economy. As you will see not immediately and definitely not via lower interest rates.
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The “naked” FED calls it ALL IN

Most central banks adopted Inflation Targeting when inflation was a real problem. The purpose of such a regime is to increase credibility, accountability and transparency for monetary policy and to permanently bring inflation to a pre-agreed target. The Fed decided to adopt such a regime at a time when inflation is not really a problem. Why would it do that?
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The right fiscal policy will ensure long term growth in Romania again

Yesterday I presented a graph showing that now WB expects EU to be in recession in 2012. M y point was that Romania should take this information into account and act on it. And I left it like that. I would not have come back to it but one of my readers pointed out that it is easy to just point to a problem without offering a solution. This is true. It is easier to be a bystander pointing to a problem than offering the solution to the problem.
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