Inflation Inertia and Inflation Persistence in Romania Using a DSGE Approach

Inflation Inertia and Inflation Persistence in Romania Using a DSGE Approach

DOI: 10.4018/978-1-5225-9269-3.ch007

Abstract

The main purpose of this chapter is to investigate monetary policy dynamics, as well as the inflation inertia and inflation persistence in Romania using a DSGE approach. The empirical findings revealed that the price evolution reflects the difficulties of eliminating the inflation inertia. Moreover, in Romania, the historic inflation evolution has a significant influence in terms of inflation expectation patterns. Inflation is a negative phenomenon with dramatic consequences for Romania's economic development on long term.
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Literature Review

There is a significant number of empirical studies and theoretical analyses that approach the inflation evolution and offer a perspective on the monetary policy in Romania. Scutaru and Stănică (2005) used a structural autoregressive vector to capture the output gap evolution in Romania and they evaluated the effects of the inflationist shocks to the Romanian economy. A Philips relation between unemployment and inflation is also emphasized in the study. Boţel (2010) used a univariate approach to capture CORE3 inflation inertia in Romania. Caraiani used a range of DSGE models to analyze the Romanian economy dynamics. Thus, Caraiani (2009a) tackled the problem of the inflation persistence in Romania, using a standard CIA model and an augmented CIA model.

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