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Monetary policy is the government or central bank process of managing money supply to achieve specific goalssuch as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. Monetary policy can involve changing certain interes rates, either directly or indirectly through open market operations, setting reserve requirements, or trading in foreign exchange markets.
Types of monetary policy: In practice all types of monetary policy involve modifying the amount of base currency (M0) in circulation. This process of changing the liquidity of base currency is called open market operations.
Monetary Policy: Target Market Variable: Long Term Objective:
Inflation Targeting Interest rate on overnight debt A given rate of change in the CPI
Price Level Targeting Interest rate on overnight debt A specific CPI number
Monetary Aggregates The growth in money supply A given rate of change in the CPI
Fixed Exchange Rate The spot price of the currency The spot price of the currency
Gold Standard The spot price of gold Low inflation as measured by the gold price
Mixed Policy Usually interest rates Usually unemployment + CPI change
Monetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base.
From 1995 to 2004, Romanias weighted average annual rate of inflation was 14.99 percent, down from 20.35 percent from 1993 to 2003 reported in the 2005 Index. As a result, Romanias monetary policy score is 1 point better this year.
The National Bank of Romania (NBR) is the country's central bank, having legal personality. It is an independent public institution headquartered in Bucharest and may have branches and agencies in Bucharest and within the territory of Romania.
The primary objective of the NBR is to ensure and maintain price stability. The main tasks of the NBR are the following:
a. to define and implement the monetary policy and the exchange rate policy;
b. to conduct the authorisation, regulation and prudential supervision of credit institutions and to promote and oversee the smooth operation of payment systems with a view to ensuring financial stability;
c. to issue notes and coins to be used as legal tender on the territory of Romania;
d. to set the exchange rate regime and to supervise its observance;
e. to manage the official reserves of Romania.
Without prejudice to its primary objective of ensuring and maintaining price stability, the NBR supports the general economic policy of the Government. In carrying out their tasks, the NBR staff and the members of its decision-making bodies must not seek or take instructions from public authorities or from any other institution or authority. In conducting the monetary policy, the NBR staff members make use of procedures and instruments specific to open market operations and lending to credit institutions, as well as of the required reserve mechanism. The purchase by the NBR of debt securities issued by the Government, national and local public authorities, régies autonomes, national corporations, national companies and other majority state-owned companies in the primary market is prohibited. The NBR may perform, in the secondary market, reverse operations, outright purchases/sales or may grant loans collateralised by the pledge of claims against or securities of the Government, national and local public authorities, régies autonomes, national corporations, national companies and other majority state-owned companies, credit institutions or other legal entities, may conduct foreign exchange swaps, issue certificates of deposit and collect deposits from credit institutions, under the terms and conditions it deems appropriate for achieving its monetary policy objectives. Overdraft facilities or any other type of credit facility with the NBR in favour of the Government, national and local public authorities, régies autonomes, national corporations, national companies and other majority state-owned companies are prohibited as well. The NBR's financial statements are prepared in accordance with the accounting principles and rules established by the international accounting standards, applicable to central banks, acknowledged by the European Central Bank, and must include the following: balance sheet, profit and loss account and the notes on the accounts. They must be audited by financial auditors, legal entities authorised by the Financial Auditors Chamber in Romania, selected by the NBR Board on an auction basis. On 31 December 2004, the current capital of the NBR (ROL 100 billion) was raised to ROL 300 billion, being fully owned by Government.
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- Monetary Policy in the Last 15 Years in Romania.doc