1. The Analysis of the Monetary Policy Stance In Romania Using Monetary Conditions Index (MCI). The Case of Managed Floating Under MCI Targeting The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance DISSERTATION PAPER MSc. Student: Cristian Sabou Supervisor: Prof. Moisa Altar Bucharest, July 10, 2001

2. Objectives Models of the MCI in a small open economy Econometrical estimation and parameter determination Conclusions Contents Concepts rewiew A model of MCI in a managed floating fx regime

3. The characteristics of monetary policy stance in Romania The influence of the FX managed float regime of Romania over the real monetary policy stance in the economy The variables used by the NBR in conducting its monetary policy

4. The monetary policy of the NBR: rules vs. discretionarity The operational targets of the NBR: the interest rate, the exchange rate of ROL and the monetary base Can the Monetary Conditions Index be calculated for Romania? The information provided by the MCI for the monetary policy in Romania

5. Derivation of the MCI in an Open Economy A simple model of an open economy From this model it is derived (Ball,1997) the MCI:

6. Through minimization of the loss function, Gerlach and Smetz obtain:

7. The case of managed floating in determiningthe MCI

8. A monetary policy framework for small open economies using MCI

9. The empiric testing of the Monetary Conditions Index (MCI) for a managed floating currency regime We will estimate the structural parameters taking into account the IS curve in the same model We use the industrial production as a proxy variable for the output

10. Variables

11. ADF test The only nonstationary series are L_CS and L_PROD_FX

12. For the order of integration, we determine the first difference: We find that the L_CS and L_PROD_F are first order integrated, so the OLS or VAR are not appropiate. I will use a partial adjustment model.

13. Structural parameter estimation taking into account the USD/ROL fx rate

14. The residual graph:

15. According to the Jarque - Bera test, the errors are normally distributed Other tests:

16. So, in this case we have obtained:

17. The structural parameter estimation taking into account the Basket / ROL real FX rate

18. The residual graph looks like: Jarque - Bera test shows that the errors are normally distributed

19. Other tests are:

20. So, in this case we have obtained:

22. Other factors that influence the choice of the foreign exchange rate regime in Romania the manner in which inflationary expectations are formed the currency structure of the external andd internal debt the stage of the process of the integration in U.E.

23. Conclusions the stance of the monetary policy was much more restrictive in the period of 1997 - 2000, than NBR aimed at if a managed floating regime is not taking into consideration the currency of the main trading partners, this would cause high output variability in the near future, Romania will have to redirect its fx regime towards the euro (starting with the targeting the EUR/ROL fx rate within still a managed floating currency regime)