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Inflation Targeting And The Moldovan Leu: Evidence From A Var On Monetary Channels

Author

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  • Viorica LOPOTENCO

    (Academy of Economic Studies of Moldova, Republic of Moldova)

  • Ana CIRLAN

    (Academy of Economic Studies of Moldova, Republic of Moldova)

Abstract

Using annual data for 2004–2024, the paper examines how inflation targeting feeds through to Moldova's USD/MDL exchange rate. The model is a two-lag VAR with a constant built on five series: ΔUSD/MDL, the policy rate, ΔM2, ΔCPI, and foreign-exchange reserves (ΔFX). Unit-root tests (ADF) motivate differencing; impulse responses (IRF) and forecast-error variance decomposition (FEVD) trace dynamics. Results show that monetary policy affects the exchange rate mainly through liquidity and prices rather than the policy rate. A positive money-supply shock depreciates the leu, while inflation shocks raise exchange-rate volatility. The policy rate's appreciation effect is in the expected direction but statistically weak. FEVD indicates that most variation in the exchange rate is due to its own history, with a meaningful share explained by monetary factors (money and prices). Policy implication: liquidity management and anchoring inflation expectations matter more for exchange-rate stability than small interest-rate moves.

Suggested Citation

  • Viorica LOPOTENCO & Ana CIRLAN, 2025. "Inflation Targeting And The Moldovan Leu: Evidence From A Var On Monetary Channels," European Journal of Accounting, Finance & Business, "Stefan cel Mare" University of Suceava, Romania - Faculty of Economics and Public Administration, West University of Timisoara, Romania - Faculty of Economics and Business Administration, vol. 13(2), pages 64-70, June.
    • Handle: RePEc:scm:ejafbu:v:13:y:2025:i:2:p:64-70
    DOI: 10.4316/EJAFB.2025.13207
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    References listed on IDEAS

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