the academy of economic studies bucharest doctoral school of banking and finance
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The Academy of Economic Studies Bucharest Doctoral School of Banking and Finance. DISSERTATION PAPER. The Analysis of the Monetary Policy Stance In Romania Using Monetary Conditions Index (MCI). The Case of Managed Floating Under MCI Targeting. MSc. Student: Cristian Sabou - PowerPoint PPT PresentationTRANSCRIPT
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 The Academy of Economic Studies BucharestBucharest
Doctoral School of Banking and FinanceDoctoral School of Banking and Finance
DISSERTATION PAPER
MSc. Student: Cristian SabouSupervisor: Prof. Moisa Altar
Bucharest, July 10, 2001Bucharest, July 10, 2001
• 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
The characteristics of monetary policy stance in Romania
The influence of the FX managed float regime of Romaniaover the real monetary policy stance in the economy
The variables used by the NBR in conducting its monetary policy
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
Derivation of the MCI in an Open Economy
A simple model of an open economy
111 )( tttttt eey
11 ttttt yery
111 ttt re
)()1( 1 ttttt ebaywrewMCI
From this model it is derived (Ball,1997) the MCI:
Through minimization of the loss function, Gerlach and Smetz obtain:
22
21 )()~( T
tSttt yL
)(/)()(/1 111T
tTS
tDt
optt EMCI
tT
tttoptt ybaryfr ~)(ˆ)~,(
tT
tttoptt ybaICMyfMCI ~)(ˆ)~,(
The case of managed floating in determiningthe MCI
dtttt ery 210
dtttttt eeEry 31210
ttt eeE 1
dttttt eery 3210
dttttt eeerry )ˆ()ˆ( ~
321
)()( 03201 eeerrMCI ttt
ttopt
t rICMi
)(1
1 *
**)(1
1ttt
optt rICMs
A monetary policy framework for small open economies using MCI
The empiric testing of the Monetary Conditions Index (MCI) for a managed floating currency regime
)()( 03201 eeerrMCI ttt
We will estimate the structural parameters taking into account the IS curve in the same model
dttttt eery 3210
We use the industrial production as a proxy variable for the output
Name Description
L_CS Fx nominal rate for USD/ROL in log
L_CS_REAL Fx real rate for USD/ROL in log
DOB_REALA The real interest rate for corporates
L_PROD_FX Industrial production index with fixed base
ianuarie 1997 in logaritm
L_USD_FX Real fx rate of USD/ROL with fixed base as of
1/97 in log
L_BSK_FX Real fx rate of BASKET /ROL with fixed base
as of 1/97 in log
Variables
L_CS L_CS_REAL DOB_REALA L_PROD_FX L_USD_FX L_BSK_FXconstantăşi trend
Constantă Constantăconstantă şi
trendconstantă
constantă
Lag 1 1 1 1 1 1
t statistic -3,1072 -5,4095 -4,4941 -2,9820 -4,6777 -6,48461% -4,1458 -3,5778 -3,5778 -4,1678 -3,5778 -3,57785% -3,4987 -2,9256 -2,9256 -3,5088 -2,9256 -2,9256
ADF test
The only nonstationary series are L_CS and L_PROD_FX
For the order of integration, we determine the first difference:
ΔL_CS ΔL_PROD_FXConstant
ăConstantă
Lag 1 1
t statistic -11,7830 -6,64101% -3,5653 -3,58145% -2,9202 -2,9271
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.
Structural parameter estimation taking into account the USD/ROL fx rate
L_PROD_FX = –0.0167 + 0.7880·L_PROD_FX(-1) + 0.1030·L_USD_FX(-3) +
(-0.572) (8.670) (1,205)
0.4477·ΔL_USD_FX –0.621·DOB_REALA+ -0.106·DM9803 -
(1,194) (-1,081) (1,837)
0.123·SEAS(12)
(-4,131)
The residual graph:
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
97:07 98:01 98:07 99:01 99:07 00:01 00:07
According to the Jarque - Bera test, the errors are normally distributed
0
2
4
6
8
10
12
14
-0.10 -0.05 0.00 0.05 0.10
Series: ResidualsSample 1997:03 2000:12Observations 46
Mean -1.61E-17Median 0.004532Maximum 0.122594Minimum -0.110723Std. Dev. 0.051092Skewness -0.112420Kurtosis 3.285504
Jarque-Bera 0.253126Probability 0.881119
R-squared 0.778199 Mean dependent var -0.235604Adjusted R-squared 0.744076 S.D. dependent var 0.108486S.E. of regression 0.054882 Akaike info criterion -2.828000Sum squared resid 0.117469 Schwarz criterion -2.549728Log likelihood 72.04399 F-statistic 22.80559Durbin-Watson stat 2.244708 Prob(F-statistic) 0.000000
Other tests:
So, in this case we have obtained:
1030.04477.0,621.0 321 si
The structural parameter estimation taking into account the Basket / ROL real FX rate
L_PROD_FX = –0.003 + 0.8045·L_PROD_FX(-1) + 0.1060·L_BSK_FX(-3) +
(-0.101) (8.920) (1,189)
0.617·ΔL_BSK_FX –0.6740·DOB_REALA+ -0.112·DM9803 -
(1,579) (-1,178) (1,941)
0.1259·SEAS(12)
(-4,237)
The residual graph looks like:
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
97:07 98:01 98:07 99:01 99:07 00:01 00:07
Jarque - Bera test shows that the errors are normally distributed
0
4
8
12
16
-0.10 -0.05 0.00 0.05 0.10
Series: ResidualsSample 1997:04 2000:12Observations 45
Mean -2.37E-17Median 0.001646Maximum 0.121494Minimum -0.116521Std. Dev. 0.050540Skewness -0.144529Kurtosis 3.432204
Jarque-Bera 0.506915Probability 0.776113
Other tests are:
R-squared 0.755546 Mean dependent var -0.241414Adjusted R-squared 0.716948 S.D. dependent var 0.102220S.E. of regression 0.054384 Akaike info criterion -2.843464Sum squared resid 0.112389 Schwarz criterion -2.562428Log likelihood 70.97795 F-statistic 19.57472Durbin-Watson stat 2.254033 Prob(F-statistic) 0.000000
So, in this case we have obtained:
1060.06170.0,6740.0 321 si
EVOLUTION OF THE MCI, WITH BASIS PERIOD AS OF JANUARY 1997
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
TIMP
ICM
MCI_USD MCI_BASKET
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.
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)