Research
A DSGE Model with Partial Euroization: The Case of the Macedonian Economy
Abstract: This paper describes the theoretical structure and estimation results for a DSGE model for the Macedonian economy. Having as benchmark the model of Copaciu et al. (2015), modified to allow for a fixed exchange rate, we are able to match relatively well the volatility observed in the data. Given the monetary policy regime in place, the debt deflation channel is more important relative to the financial accelerator one when compared to the flexible exchange rate case. The lack of balance sheet effects results in no significant differences in terms of net worth evolution across the two types of entrepreneurs when impulse response functions are evaluated. However, the shocks related to the financial sector appear to be especially important for investment, for the domestic interest rate and interest rate spreads, illustrating the relevance of including financial frictions in the model. With the exchange rate not acting as a shock absorber, the external shocks are more relevant for the CPI inflation and the domestic interest rate. The drop in GDP associated with the pandemic mainly reflects the negative innovations to the consumption preference shock and to the permanent technology shock.
R.E.M. 2.0 - A DSGE model with partial euroization estimated for Romania
Abstract: This paper describes the theoretical structure and the estimation results for a DSGE model with partial euroization for the Romanian economy. Having as benchmark the small open economy model augmented with financial and labor market frictions of Christiano et al. (2011), the main additional features we introduce refer to partial euroization in the financial sector and an extension of the foreign sector to a two‑country semi-structural model. Following a depreciation of the domestic currency induced by a sovereign risk premium shock, GDP decreases due to a stronger contractionary balance sheet effect (as some of the entrepreneurs are now exposed to the exchange rate risk) relative to the expansionary impact through the net exports channel. With foreign currency financial transactions taking place only in EUR, while trade in goods and services is carried out in both EUR and USD, external shocks have different effects on the domestic economy, according to the originating country (i.e. the euro area or the US). Thus, one can assess the impact of diverging monetary policies of the ECB and the FED on emerging economies through both financial and trade channels.
Estimation of an open economy DSGE model with financial and employment frictions for Romania
Abstract: This paper estimates the model of Christiano et al. (2011) on Romanian data. In doing so, it is found that adding financial and employment frictions to the baseline open economy model improves its capacity in matching the standard deviations of the extremely volatile observed series. A subset of shocks (consumption preference, entrepreneurial wealth, temporary productivity, risk premium and domestic markup) is found to be the main driver of the fluctuations in variables. The marginal efficiency of investment and investment specific technology shocks do not play a major role in explaining business cycle fluctuations. The growth rate of GDP in the expansion was driven by permanently positive contributions of the unit root neutral technology, entrepreneurial wealth and country risk premium shocks, while during the crisis period, negative technology neutral, both permanent and temporary, and consumption preferences shocks greatly accentuated the downturn.
Survey evidence on price-setting patterns of Romanian firms
with F. Neagu and H. Braun-Erdei
Abstract: This paper presents for Romanian firms the results of the first survey on price-setting patterns among the New Member States of the EU. Diverging from Inflation Persistence Network (IPN) findings, generally small firms perceive higher competitive pressure and adopt the market price, using a state-dependent rule, while lower perceived competition is consistent with medium and large firms using mark-up pricing. Prices are reviewed and changed more often than for EMU firms and are more flexible than wages. Similar to IPN evidence, contracts are the main sources of price stickiness. The survey suggests full price transmission of large unanticipated financial shocks.
FDI Inflows in Romania: A Comparative Perspective
Abstract: Although increasing continuously, Romania had at any point throughout the 2003-2009 period the lowest inward FDI stock in per capita terms among the EU10 countries. Relative to GDP, the inward FDI stock stood at the end of 2009 at 43.1%, a mid-range value across EU10 countries, similar with those of Latvia and Poland. In line with the other EU10 countries, most of the inflows were allocated to the services sector, followed by the manufacturing one, while the constructions and energy sector and agriculture managed to attract only a small share of the accumulated inflows. Both in Romania and across EU10 countries FDI was resource- and efficiency-seeking in the tradable sector (manufacturing, agriculture and mining), with openness and relative costs being the main determinants. In the nontradable sector (services, constructions and energy) FDI in the EU10 countries was mostly market seeking, with growth potential of the market being the main determinant. Most of FDI inflows came in previously underdeveloped sectors like financial intermediation, wholesale and retail trade and real estate. Like in manufacturing, they also reflected the privatization of formerly state-owned firms. We find a set of institutional variables to have a positive impact on FDI inflows. A way authorities should follow in order to attract more FDI is to generate improvements in the areas the respective variables refer to: better infrastructure (railways, roads – for tradables only, telecommunications – for nontradables only) and developing the environment for a more competitive and better governed private sector (with positive effects of privatization, enterprise restructuring and corporate governance, bank reform and competition policy, the latter two for tradable sector only).
Health Status and the Saving Behaviour of Pensioners - Evidence from Romania
with L. Croitoru and F. Mihaescu
Abstract: This paper presents evidence on the impact of health related variables on the saving rate of Romanian retired households. With universal public health insurance coverage, a pay-as-you-go pension system and more than 98 per cent of the households owning the house they live in, retired households continue to save, with saving rates increasing faster with the number of healthy members relative to those with a different health status. After controlling for healthcare costs, the positive effect of the health status variables on savings reflects the influence of the precautionary motive alone, as households with at least one ill member during the interview month also save more. Furthermore, once health related variables are controlled for, life expectancy becomes less important in driving savings at old age. Naturally, current healthcare costs like hospital stays and medicines negatively affect the saving rate.
Direct inflation targeting in Romania (in Romanian only)
with C. Popa, C. Botel, D. Antohi, I. Udrea, T. Grosu, A. Galatescu
Abstract: Romania adopted an inflation targeting monetary policy regime starting with August 2005. The paper presents an assessment of its performance up to May 2009.
Potential GDP Estimation for Romania
with A. Galatescu and B. Radulescu
Abstract: The paper’s objective is to estimate the growth rates of potential GDP for Romania. To this end, we present and implement several univariate and multivariate methods for the measurement of potential GDP growth: production function, filters with unobservable components, structural vector autoregressions. The results are robust to changing approaches and specifications, pointing to an acceleration in the annual growth rate of potential GDP from an average of 3-4 percent between 2000-2002 to values around 6 percent in the recent period.
Abstract: In January of 2005, Romania introduced a flat tax on personal income and corporate profits set at 16 percent, thereby joining a group of other countries that have adopted similar measures. This paper presents an analysis of the first year of the flat tax – its effects on central budgets, local budgets, and personal income. Positive impacts on personal income were shown to be significant only for urban households with above-average income levels. As expected, consolidated budget revenues in 2005 were lower relative to the ones collected throughout 2004, with the decrease in revenues being absorbed by the central administration, as local government quotas were increased. Based on the survey responses of local authorities from six counties from northwestern Romania, the immediate effects of the flat tax were seen as positive: more new jobs were created in urban areas, while job creation was constant in rural areas; firms were generally affected positively, also with benefits concentrated in urban areas; all parties were pleased with the simplified tax procedure. After considering several policy options intended to raise budget revenues, we argue for maintaining the flat tax rate for personal income and corporate profits at 16 percent, while improving the system by: eliminating all exemptions; enforce the law without partisanship and offer performance-based contracts with fiscal administrators that offer high incentives to avoid bias or corruption in tax collection; implement all necessary measures and corrections – even if it means postponing certain measures – at the same time; do not decrease the share local governments receive from PIT revenue (it was this increase that insulated local budgets from shock); provide local governments with more control over their tax base, either by enlarging the amount of local taxes they may impose or increasing their control over certain revenue sources (this will improve service provision and control and decrease political dependency); last but not least, reevaluate expenses to increase efficiency.
Current Account Sustainability: The case of Romania (in Romanian only)
with I. Racaru
Abstract: The paper offers both a qualitative and quantitative assessment of the current account sustainability for Romania, up to 2005. The increase of the current account deficit starting with 2004 is explained by a speed-up in the catching up process, as well as by the real appreciation of the domestic currency. Over the medium term, the financing of the deficit should not be a problem provided that foreign investments will go towards projects that will have a positive medium term impact on the growth potential of the economy. The share of medium and long term foreign debt in GDP has been relatively constant, while the increase in short term debt raises some concerns. The financial stability can be affected by an increase in foreign debt mainly through: i) the exchange rate risk, a sudden depreciation of the domestic currency could lead to a substantial increase of the financing cost; ii) an increase in the risk premium given a change in investors perception, the latter being the result of either a domestic or regional shock. Given the latest forecasts regarding the fiscal deficit for 2006, keeping the fiscal stance such that no additional pressure is exerted on the (both domestic and external expectations of) sustainability of the current account should become a priority. The models used, while suggesting the sustainability of the current account deficit, point also towards its short to medium term persistence.
Early Waring Systems on Currency Crises
with I. Racaru
Non-governmental Credit in Romania: Prospects and Evolutions (in Romanian only)
with F.Neagu, A. Margarit, I. Racaru, R. Mircea, A. Andrassy