Study on the Interactions Between Fiscal Policy, Monetary Policy and Financial Stability in Romania

This paper aims to explore the interactions between fiscal policy, monetary policy and financial stability in Romania over the past two decades, a period marked by the impact of the 2010s economic crisis, the subsequent period of economic recovery, and the effects of the COVID-19 pandemic on the country's economic landscape. Through the utilisation of a B-VAR model with representative indicators for each of the policies described above, namely: economic growth, consumer price index, public debt, bank solvency rate and ROBOR 3M interest rate, it will be analysed how the policies have influenced one another over the analysed period. The main findings suggest that in the case of Romania, the monetary policy shock, expressed at the level of the interest rate, has a more pronounced impact in the short term on the macroeconomic variables than the fiscal policy shock, expressed at the level of public debt, while an increase in the bank solvency rate will have an immediate positive effect on the public debt. The paper contributes to the existing literature through the recommendations that arise, for all the policies, in order to ensure economic stability, a countercyclical behaviour is recommended. For financial stability, in order to limit the sovereign risk on the banking sector, public finance stress testing could be implemented, that could reveal specific banks that have a higher sovereign default risk and for which it could be applied higher capital requirements. In the case of monetary policy, the national authority could take into account not only the inflation gap, but also some specific financial stability gaps, in order to reduce the fluctuations in the financial cycle, with positive output effects in the long-run. Another key fact for ensuring a climate of financial stability and development is the good coordination between the three types of policies.