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The relationship between gross domestic product and monetary variables in Romania. A Bayesian approach

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  • Mihaela Simionescu
  • Jenica Popescu
  • Victoria Firescu

Abstract

For establishing the suitable monetary policy it is essential to know if there is a relevant relationship in practice between gross domestic product (G.D.P.) variations and monetary variables. The purpose of this study is to analyse the causality between output variation and money aggregate in Romania for quarterly data in the period 2000:Q1–2015:Q2. Moreover the impact on G.D.P. growth of other variables connected with money demand is assessed using Bayesian techniques. The results indicated a bidirectional relationship between G.D.P. variations and rate of real money demand in the mentioned period. The Granger causality test combined with stochastic search variable selection indicated that active interest rate and discount rata mostly explained G.D.P. variations. According to results based on Bayesian regime-switching models, contrary to expectations, the interest rate increases continued to generate higher output variations, the consumption being the engine of economic growth in Romania. In periods of economic recession, the lower interest rate stimulated the recovery of the economy.

Suggested Citation

  • Mihaela Simionescu & Jenica Popescu & Victoria Firescu, 2017. "The relationship between gross domestic product and monetary variables in Romania. A Bayesian approach," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 30(1), pages 464-476, January.
    • Handle: RePEc:taf:reroxx:v:30:y:2017:i:1:p:464-476
    DOI: 10.1080/1331677X.2017.1305798
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