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Inflation Dynamics in Romania – a New Keynesian Perspective

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  • Nicoleta CIURILA
  • Bogdan MURARASU

    (Academy of Economic Studies)

Abstract

We investigate in this paper the main factors which drive inflation in Romania: inflation persistence, inflation expectations and real economy variables. We estimate a reduced form hybrid New Keynesian Phillips Curve in order to determine the degree of inertia and the impact of forward looking expectations. As a proxy for real economic activity, we alternatively use the change in the real labour cost, output gap, the capacity utilization rate, the economic sentiment indicator and the unemployment gap. We find that the capacity utilization rate and the unemployment gap are good proxies for the real economic activity. Inflation inertia is more important in explaining CPI inflation than rational expectations confirming the fact that inflation expectations in Romania are still highly adaptive.

Suggested Citation

  • Nicoleta CIURILA & Bogdan MURARASU, 2008. "Inflation Dynamics in Romania – a New Keynesian Perspective," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 1(36), pages 155-160, May.
  • Handle: RePEc:aio:aucsse:v:1:y:2008:i:11:p:155-160
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    References listed on IDEAS

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    1. Gali, Jordi & Gertler, Mark & David Lopez-Salido, J., 2005. "Robustness of the estimates of the hybrid New Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1107-1118, September.
    2. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    3. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    4. Jordi Galí & J David López-Salido, 2001. "A New Phillips curve for Spain," BIS Papers chapters,in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 174-203 Bank for International Settlements.
    5. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
    6. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
    7. Arratibel, Olga & Rodriguez-Palenzuela, Diego & Thimann, Christian, 2002. "Inflation dynamics and dual inflation in accession countries: a 'New Keynesian' perspective," Working Paper Series 0132, European Central Bank.
    8. Campbell Leith & Jim Malley, 2007. "Estimated Open Economy New Keynesian Phillips Curves for the G7," Open Economies Review, Springer, vol. 18(4), pages 405-426, September.
    9. Matheson, Troy D., 2008. "Phillips curve forecasting in a small open economy," Economics Letters, Elsevier, vol. 98(2), pages 161-166, February.
    10. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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    Cited by:

    1. repec:ntu:ntcmss:vol5-iss1-17-36 is not listed on IDEAS
    2. Morar Triandafil, Cristina & Brezeanu, Petre & Huidumac, Catalin & Morar Triandafil, Adrian, 2011. "The Drivers of the CEE Exchange Rate Volatility - Empirical Perspective in the context of the Recent Financial Crisis," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 212-229, March.

    More about this item

    Keywords

    New Keynesian Phillips Curve; inflation dynamics; GMM estimation; forward looking expectations;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • P00 - Economic Systems - - General - - - General
    • P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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