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Monetary Policy Professor Lal C. Chugh

Goals of Monetary Policy National Bank of Romania (NBR) Primary Objective “Ensure and maintain price stability” Formulate and implement monetary policy “Inflation Targeting”

Monetary Policy “Inflation Targeting” Australia, Canada, New Zealand, Sweden Brazil Advantages of “Inflation Targeting” Reduce Risk of Inflationary Expectations Reduce Uncertainty in Contracts Keep Interest Rate Low

Monetary Policy Are goals the same in every country? US—”Twin Goals”—Maintain Price Stability and Ensure High Employment

Monetary Policy Euro zone and European Central Bank Primary Goal –ensure low rate of inflation 2% Views on bursting “bubbles”? Japan---”Create inflation” Is “Zero inflation”/Deflation desirable? Exchange Rate---Bulgaria, Hong Kong

Monetary Policy “To Provide Liquidity”----in all countries Mechanism--- Romania---Target Romanian Interbank Offer Rate (ROBOR); Current Policy Rate=7% Change? US—Federal Funds Rate “Open Market Operations” Buy/Sell securities “Required Reserve Ratios” Change Ratios Romania---Yes; US ??

Monetary Policy Performance of NBR--- Inflation Targets are set in consultation with the govt. Target for 2008=3.8% Actual= 7.8% Target for 2009= 3.5% Actual=5.5% Target for 2010= 3.5% Forecast=4.3% Target for 2011= 3.0% Forecast=3.3% Trend towards reduction in inflation rate. CPI (Headline); CORE2( it excludes administered, volatile prices and items subject to excise duties)

Strengths and Weaknesses of Romania Growth rate GDP since 2005—Good except 2009 Unemployment Rate—Higher in 2009 Deficit— Little high Govt. Debt Ratio ---good, but rising; Most of the debt in local currency (Lei) Interest rate—declining International Reserves—good Inflation Rate—High in 2009

Strengths and Weaknesses of Romania Current Account Deficit—5-6% Exports and Imports—Ensure that exports increase and imports do not increase rapidly What kind of a policy? FX Rate? FDI inflow External Debt Stock —60% of GDP Risk of short term funds inflow

Strengths and Weaknesses of Romania Openness Index (Exports+Imports of goods)/ GDP=63% and increasing. (X+M of goods and services/GDP=75%) Romania’s Exports to EU countries=71% Romania’s Imports from EU countries=72.0% Romania’s Exports to top 5 EU countries=45%+ Romania’s Imports from Top 5 EU countries=40%+

Convergence Criteria Four Criteria 1. Inflation Rate less than 1.5% above the av. of three best performers in EU; also“sustainability” 2. General Govt. Deficit below 3% of GDP 3. Govt. Debt below 60% of GDP 4. Long Term Interest Rate less than 2% above the av.of three best performers in EU by inflation rate

Convergence Criteria Prior to adoption, FX rate +/- 15% for two years. Criteria of debt and deficit must be met as well. Romania and Euro Inflation rate is higher Govt. Deficit is higher Long term interest rate is higher Govt. Debt is much lower than 60%. Actual is 25%+. FX Rate is within the range

Romania and Euro Other Criteria ---Cohesiveness: Real GDP per Capita Sectoral Structure---Agriculture, Industry, Services Openness of the Economy Share of Trade with EU in total Trade

Romania and Euro Integration with EU---Same Business Cycle Trade and Financial Sector GDP per capita has increased (2009?) Service Sector has expanded

Advantages of Euro Credit Rating improves Slovenia AA Adopted Euro 2007 Slovakia A+ Adopted Euro 2009 Both countries have high deficit and debt ratios. *Romania BB+/Neg. BBB-/Neg. (Local Currency) * Below Investment Grade Cost of borrowing for Govt. and Firms--high

Advantages of Euro FX Risks of Exports/Imports with EU/ Eurozone decline Easier access to capital markets for borrowers Commodity Prices-- uniform and lower Easier to maintain accounts

Thank You Mulţumesc!