1 / 44

DETERMINANTS OF INFLATION IN ROMANIA

DETERMINANTS OF INFLATION IN ROMANIA. Student: COVRIG NICOLAE Supervisor: Prof. MOIS Ă ALTĂR. The facts . I nflation in CEE transition economies (annual percentage change). The goals. To find out the causes of high and persistent inflation in ROMANIA

MikeCarlo
Download Presentation

DETERMINANTS OF INFLATION IN ROMANIA

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. DETERMINANTS OF INFLATION IN ROMANIA Student: COVRIG NICOLAE Supervisor: Prof. MOISĂ ALTĂR

  2. The facts ... Inflation in CEE transition economies (annual percentage change) DOFIN, Bucharest, June 2002

  3. The goals... • To find out the causes ofhigh and persistent inflation in ROMANIA • To asses therole of monetary and other economic policies in the disinflation process DOFIN, Bucharest, June 2002

  4. Possible explanations... • Supply or cost-push pressures • wages • currency depreciation • Demand-pull factors • monetary expansion to finance fiscal deficits • large nonsterilized capital inflows • Structural changes or rigidities • price deregulations • relative price changes DOFIN, Bucharest, June 2002

  5. …and answers for Romania case • The most important factors in driving inflation are the relative price adjustments and the high volatility of inflation • Nominal exchange rate depreciation and the nominal wage increases remain a source of inflationary pressures due to risk of spill-overs • The monetary sector of the economy is not an important determinant of inflation • There is an important inertia component in the inflation evolution • The inflationary expectations can be cut off only through coherent structural policies DOFIN, Bucharest, June 2002

  6. Cointegration analysis (in level of variables) MONEY MARKET LABOUR MARKET Deviation from long-run equilibrium (lagged one period) VAR MODEL Short term dynamics of endogenous variables FOREIGN EXCHANGE MARKET RELATIVE PRICE ADJUSTMENTS ADMINISTRATIVE DECISIONS ABOUT PRICES Exogenous variables ModellingApproach Sample: 1996:01 – 2002:02 Frequency: monthly DOFIN, Bucharest, June 2002

  7. LONG RUN EQUILIBRIUM ON THE MONEY MARKETTheoretical consideration (Ericsson 1998) Where: - nominal money demand (in log) - scale variable, GDP for instance (in log) - rate of return on money itself (expressed in level) - rate of return on assets outside of money (expressed in level) - rate of inflation DOFIN, Bucharest, June 2002

  8. LONG RUN EQUILIBRIUM ON THE MONEY MARKETChoice of variables for Romania case (1/8) Monthly observation for M2XR where M2XR = M2R – resident’s foreign currency deposits Seasonally adjusted time series was use M2XR is I(1) DOFIN, Bucharest, June 2002

  9. LONG RUN EQUILIBRIUM ON THE MONEY MARKETChoice of variables for Romania case (2/8) THE CHOICE OF M2XRSA WAS JUSTIFIED BY: the strong correlation between M1R and M2XR the intention to capture the monetary substitution the greater volatility in M2XR the avoidance of portfolio reallocation due to financial innovation DOFIN, Bucharest, June 2002

  10. LONG RUN EQUILIBRIUM ON THE MONEY MARKETChoice of variables for Romania case (3/8) As scale variable we use the volume of industrial production (seasonally adjusted series) LYSA ~ I(1) at 99% To put in evidence the optimal portfolio selection we use: the nominal deposit rate applied by banks to non-bank customers (% per year) DR ~ I(1)at 99% The nominal depreciation of ROL against USD is used as proxy for return of deposits in foreign currencies as principal assets outside the M2XR DLEXUSD ~ I(0) or I(1) taking into account the structural break DOFIN, Bucharest, June 2002

  11. LONG RUN EQUILIBRIUM ON THE MONEY MARKETJohansen cointegration analysis (4/8) REMARK: DUMMY9703 included – cointegration test possibly affected 2 LAGS IN VAR DOFIN, Bucharest, June 2002

  12. LONG RUN EQUILIBRIUM ON THE MONEY MARKETJohansen cointegration analysis (5/8) DOFIN, Bucharest, June 2002

  13. LONG RUN EQUILIBRIUM ON THE MONEY MARKETJohansen cointegration analysis (6/8) DOFIN, Bucharest, June 2002

  14. LONG RUN EQUILIBRIUM ON THE MONEY MARKETStatistics for Johansen cointegration analysis (7/8) DOFIN, Bucharest, June 2002

  15. LONG RUN EQUILIBRIUM ON THE MONEY MARKETError correction term (8/8) The large disequilibria are strongly related to the nominal exchange rate depreciations and to the nominal deposit rate increase MODELLING APPROACH DOFIN, Bucharest, June 2002

  16. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETTheoretical consideration Real wage W/P is a mark-up over the labour productivity LP and where P – level of price E - employment W – net nominal wage Y - output DOFIN, Bucharest, June 2002

  17. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETVariable evolution ALL VARIABLES ARE I(1) DOFIN, Bucharest, June 2002

  18. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETJohansen cointegration test REMARK: SEASONAL CENTERED DUMMIES WERE INCLUDED DUMMYDEC and DUMMYJAN; 10 LAGS IN VAR DOFIN, Bucharest, June 2002

  19. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETJohansen cointegration test DOFIN, Bucharest, June 2002

  20. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETAdditional statistics DOFIN, Bucharest, June 2002

  21. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETAdditional statistics DOFIN, Bucharest, June 2002

  22. LONG RUN EQUILIBRIUM ON THE LABOUR MARKETError correction term (8/8) MODELLING APPROACH DOFIN, Bucharest, June 2002

  23. RELATIVE PRICE ADJUSTMENTS (1/7)Theoretical considerations Ball and Mankiw (1995) offer sound justification for including skewness of the distribution of relative price changes as an explanatory variable for inflation assymetric shocks are very important Ball and Mankiw (1994) explain the mechanism through which inflation is influenced by the variance of the shocks trend inflation is very important Reasons for asymmetric, relative price adjustments - the cost-recovery hypothesis - relative wages of high-skilled workers may be slow to adjust to equilibrium - insufficient adjustment of measured prices for qualityimprovements - the Balassa-Samuelsoneffects DOFIN, Bucharest, June 2002

  24. RELATIVE PRICE ADJUSTMENTS (2/7) 35 classes of goods and services in the CPI structure DOFIN, Bucharest, June 2002

  25. RELATIVE PRICE ADJUSTMENTS (3/7) DOFIN, Bucharest, June 2002

  26. RELATIVE PRICE ADJUSTMENTS (4/7) Highest price changes between 1997 and 2002 Smallest price changes between 1997 and 2002 DOFIN, Bucharest, June 2002

  27. RELATIVE PRICE ADJUSTMENTS (5/7) DOFIN, Bucharest, June 2002

  28. RELATIVE PRICE ADJUSTMENTS (6/7)High skewned distribution DOFIN, Bucharest, June 2002

  29. RELATIVE PRICE ADJUSTMENTS (7/7) MODELLING APROACH DOFIN, Bucharest, June 2002

  30. ADMINISTRATED PRICES Twelve month percentage change DOFIN, Bucharest, June 2002

  31. ADMINISTRATED PRICES“Net inflation” (1) DOFIN, Bucharest, June 2002

  32. ADMINISTRATED PRICES “Net inflation” (2) DOFIN, Bucharest, June 2002

  33. ADMINISTRATED PRICES “Net inflation” (3) Autonomous inflation:27,99 % per annum Inflation inertia:0.19 DOFIN, Bucharest, June 2002

  34. ADMINISTRATED PRICES “Net inflation” (4) MODELLING APPROACH DOFIN, Bucharest, June 2002

  35. SHORT RUN DYNAMICS OF INFLATION (1/7) • Unrestricted vector autoregression with one lag and: • Endogenous variables : • DLCPI (inflation rate) • DLM2XR (the change in real M2XR) • DLEXUSDR (real depreciation of ROL against USD) • Exogenous variables: • ECTMONEY(-1) (error correction term for real money) • ECTWAGE (-2) (error correction term for real wages) • WSKEW (weighted skewness of price changes) • WSTDEV (weighted standard deviation of price changes) • DUMMY9605, DUMMY9612, DUMMY9701, DUMMY9905 DOFIN, Bucharest, June 2002

  36. SHORT RUN DYNAMICS OF INFLATION (2/7) DOFIN, Bucharest, June 2002

  37. SHORT RUN DYNAMICS OF INFLATION (3/7) DOFIN, Bucharest, June 2002

  38. SHORT RUN DYNAMICS OF INFLATION (4/7)Impulse response function DOFIN, Bucharest, June 2002

  39. SHORT RUN DYNAMICS OF INFLATION (5/7)Variance decomposition DOFIN, Bucharest, June 2002

  40. SHORT RUN DYNAMICS OF INFLATION (6/7)Parsimonious model DOFIN, Bucharest, June 2002

  41. SHORT RUN DYNAMICS OF INFLATION (7/7)Parsimonious model DOFIN, Bucharest, June 2002

  42. Conclusion and policy implications (1/2) • The most important factors in driving inflation are the relative price adjustments and the high volatility of inflation • The relative price adjustment process was necessary • large shocks induced in the overall price system by energy price changes • the persistence of inflation and the relative price adjustment process increase the variability of inflation • Nominal exchange rate depreciation generates inflation by: • The price of raw material products imported • The Balassa-Samuelson effect • The nominal wages increases remain a source of inflationary pressures due to risk of spill-overs • However, in the next period the real wages evolution will not be an inflationary source DOFIN, Bucharest, June 2002

  43. Conclusion and policy implications (2/2) • The monetary sector of the economy is not an important determinant of inflation • The monetary policy has been enough tight during the period analysed • There is an important inertia component in the inflation evolution • The role of inflation expectation • The inflationary expectations can be cut off only through coherent structural policies DOFIN, Bucharest, June 2002

  44. The facts ... DOFIN, Bucharest, June 2002

More Related