Abstract

In this study we use the Bayesian VAR framework to provide an analysis of the transmission mechanism of the monetary policy. We develop a bayesian vector autoregression (BVAR) model for the Romanian economy in order to identify the major shock in Romania for the last 10 years and to provide information concerning the evolution of the economy response to these shocks. That’s why, we have included in the analysis variables that emphasize the industrial production evolution, the exchange rate, the inflation, the real estate prices, the monetary aggregate M2 and the interest rate. The analysis shows important conclusions. The exchange rate remains an important mechanism that influences significantly the variables of the real economy, but the channel of the interest rate is being more and more consistent in the last years. The positive aspect that emerges from this study is related to the absence of output and price puzzle.

Key words:  Monetary policy transmission mechanism, bayesian vector autoregression (BVAR) model, small open economy, Bayesian analysis, model comparison.