Balkan and Eastern European Countries in the Midst of the Global Economic Crisis by Anastasios Karasavvoglou & Persefoni Polychronidou

Author:Anastasios Karasavvoglou & Persefoni Polychronidou
Language: eng
Format: epub
Publisher: Physica-Verlag HD, Heidelberg

4 External Shocks and Inflation from Euro Zone. The Case of Romania

It is very important to investigate the way of passing from external shocks (petrol prices shocks brought by exchange rate oscillation, to shocks of non-oil import prices to inflation from Euro Zone), in different distribution moments (import prices, producer prices and consumption prices) (Hahn 2003).

External shocks can explain a big part of price indices variation. They might have contributed considerably to inflation in Euro Zone from the beginning of European Monetary Union. Results regarding dimension and passing speed to Euro Zone seem to be robust in time.

Knowing in depth the relation from the base of exchange rate and prices, meaning the passing exchange rate as well as its speed, is essential to evaluate accordingly the monetary policy transmission over the prices, as well as for inflation forecasting. Taking into account the volatility of euro exchange rate from European Monetary Union launch (EMU) in 1999, this subject became a priority for the monetary policy of European Central Bank (ECB) (Coricelli et al. 2006).

In addition to the strong depreciation of Euro currency beginning with 1999, Euro Zone was also hit by external shocks, namely shocks due to prices, and import prices shocks of non-oil goods. For a straight evaluation of price evolution and of risks at the price stability address, also, dimension and passing speed of these shocks over inflation in Euro Zone seems to be of great interest.

In Romania, exchange rate and prices have a direct connection. Contouring in what measure national currency devaluation is transformed in inflation is creating the premises of monetary policy decisions.

Internal price elasticity compared with the exchange rate was high and quite fast in Romania before the adhesion to European Union. It reaches a maximum of 59.72% from rate variation for production prices and 27.43% from the consumption ones. At the same time, the exchange rate variation determines 40–60% from consumption price inflation and even more in production prices.

Small rate variations influence over the inflation was achieved by adopting the monetary basket of 60/40 Euro/Dollar (Gueorguiev 2003). Inflation in an economy has a considerable influence on the elasticity (Taylor 2000). Taylor argues that by a staggered price model and monopoly competition elasticity can decrease once with the inflation. More than that, Choudhri and Hakura (2001) are extending the analysis for more countries and they reached the conclusion that between average inflation and elasticity there is a strong correlation.

Thereby, in an economy dominated by accentuated inflation imbalances, passing the exchange rate variation in internal prices is higher. Price elasticity compared with exchange rate is correlated with the economy’s opening degree, economic cycle and inflation level. In developing countries, as well as in emerging markets, passing the exchange rate difference in internal prices was more accentuated than in developed countries.

If we consider the interval 1997–2002, according to Gueorguiev, exchange rate pass-through was affecting to a great extent and very fast prices in Romania, with a value of 60% and 70% for production prices and 30–40% for consumption prices.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.